China Coal Sector:When It Rains,It Pours

Takeaways from Citi China Conference - Both Shenhua and China Coalpresented at our China Conference in Shenzhen. Mr. Huang Qing, Board Secretaryof Shenhua and Mr. Wang Xiaogang, IR Director of China Coal shared optimisticviews on long term coal price outlook though both believe that current spot coalprice (Rmb690/t) will correct. NDRC is promoting long-term contracts between coalcompanies and IPPs that potentially lock up both volume and price. Shenhuabelieves that the long-run thermal coal price should sustain at a range of Rmb550-600/t.

    Long-term contracts promoted by NDRC - according to the companies, NDRC ispromoting long-term contracts that could lock up both price and volume betweencoal companies and IPPs. The term of the contract could be 3 to 5 years. Unlike inthe past years, the new contracts will likely be more practical with enforcementmechanisms and options for litigation in case of contract breach. This could helpdirect the market expectation on coal prices and help stabilize coal prices in thelong term.

    Supply-side reform measures will likely sustain - Shenhua sees the supply-sidereform policies are effective and will likely be sustained in the coming years. Thisincludes 1) capacity cut through closing unsafe and less efficient mines. Thegovernment targets to close 500mt and consolidate another 500mt capacity by 2020with net closure of about 800mt; and 2)production cuts by reducing production daysfrom.330 to 276 annually. According to Shenhua this will likely become a new normfor coal as the coal mines have been overproducing in the past years.

    No tariff hike for 2017, how about 2018? - According to Shenhua, power tariffhike is unlikely in 2017. Even though price hike may come in 2018, due to theongoing power reform, there will be much less volume settled at the benchmarkprice level.

    Upside risk to our forecast of Rmb475/t average thermal coal price forecastfor 2017 - as both parties prepare to negotiate for contracts, we believe the coalcompanies are at advantage due to the sustaining tight supply in the near term.

    According to Sxcoal, the coal companies may take the opportunity to hike price forNov to help them negotiate with IPPs for longer term contracts. Shenhua believesthat long-run coal price should be at Rmb550-600/t.

    Transcripts - we enclosed the meeting transcripts in this note which is based onour notes and translation into English.