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Ukrainian coal (Eng)

18.04.2013 | Источник: ICU
Тема: Обзоры по компаниям и отраслям, ICU, Инвестиционный Капитал Украина

In search of market balance

Ukrainian coal: Oversupply crisis urges market rebalancing. Buoyant production of Ukrainian coal, unsupported by similar growth in its consumption, falling coal exports, and a PCI-driven shift of steel mills' demand to higher-quality coal, has led to unprecedentedly high inventories and deteriorating sales of Ukrainian miners in 4Q12-1Q13. As Ukraine's weak economic growth leaves domestic electricity consumption without its most powerful driver, and main coal export markets continue to be weak in 2013, a reduction of the coal supply has become the key factor to the market's recovery.

Market recovery underway, but its scope is uncertain. We expect the supply pressure to weaken through 2013 as there has already been a 4% YoY decline in 1Q13 Ukraine's coal production. However, it is still unclear how far the supply cuts will go in light of the following key controversial issues:

1) The need of the key players to agree on the extent of supply cuts between themselves. The market leaders, privately-owned DTEK, and the leading state miners will have to negotiate steam coal production quotas. This process does not promise to be easy and is unlikely to take into account smaller producers' interests.

2) Production cuts at unprofitable state-owned ine. The need to cut subsidies to inefficient state mines, although widely recognized by the government, is difficult to materialize due to social obligations and corruption.

3) Crackdown on illegal minig. Due to high unemployment and corruption in the mining regions, the shadow sector continues to contribute 4-6mtpa, or 5-10%, to the steam coal output, despite authorities' declared onslaught on it.

4) Quotas on imported coking col may temporarily support the market but are unable to change the trend of falling demand for domestic coking and dual-purpose coal from steel mills introducing PCI.

Ukrainian public miners: Challenging 2013. Hopeful 2014? Before the market shows any meaningful improvement, smaller Ukrainian miners should see challenging six months, with depressed sales volumes and falling earnings.

Sadovaya Group (SGR PW) proved to be one of the weakest market players, as its sales dropped to negligent figures in 4Q12-1Q13. While the company still has some chances to recover its sales by diversifying into exports, we estimate these chances as low due to weak export markets and high competition. The company's investment case remains blurred, so we reiterate our Sell recommendation for Sadovaya Group.

Coal Energy (CLE PW) has a much better chance to capitalize on the market recovery due to more established customer relationships. Management is confident about the company's return to aggressive expansion in FY14; however, market uncertainty leads us to take a much more cautious view. We maintain our Hold recommendation for Coal Energy.

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