Friday, July 2, 2010

Chinese coal producers could get hurt

• The National Development & Reform Commission (NDRC) released a statement on
June 25, 2010 that it has ordered coal companies to honor 2010 contract prices. That
means any additional recent price hikes from coal companies are to be refunded to
downstream customers by June 2010.

•In the statement, there was no mention of price cap. However, the move reflects the
government’s concern over inflation and the profitability of downstream industries.

•It raised the concern of the increased probability of further control measures should
coal pricing edge up any further. There could be some earning impact on coal producers, maybe the impact
in 2010 is minimal, but there is possibility that the original higher expected contract
coal price for 2011 would be reduced.

Although in the near term, the upside potential of coal price would remain a concern
and could cap the share price of coal producers. The production volume of a lot of producers is still expected to increase the coming years which can underscore its long term earnings outlook.

Based on the above reasons there could be some share price pressure on coal producers.

1.The economic growth in China is less than expected
2.Further tightening on the regulation of the coal prices

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