China Metals &Mining:Coal,Potential resumption of production control likely a non-event

The potential resumption of 276-day production arrangementOn 15 Feb, Bloomberg reported that China National Development andReform Commission (NDRC) is considering reinstating coal outputrestrictions to avoid the return of a coal glut after the winter heating seasonends in mid-March. According to China Securities Journal, the NDRC willconvene a meeting with some major coal miners on 21 Feb.

Current coal pricing trend does not support implementation ofstrict output control measuresChina’s benchmark coal price, Qinhuangdao (QHD, 5,500kcal/kg), hascorrected 20% from its FY16 peak as of 10 Feb. Currently at RMB586/t, QHDcoal price is still marginally above the NDRC’s targeted coal price range ofRMB500-570/t through 2017. With NDRC’s plan to control the coal pricemovement through 2017 within RMB470-600/t (if above RMB600/t or below470/t the NDRC will step in; see page 2), we do not expect any potentialcoal output control measures that may be adopted in 2017 to be as strict asthose in 1H16 when QHD price was as low as RMB365/t and most coalproducers were suffering substantial losses.

Coal long-term demand downward cycle trend still intactWe maintain our view that China’s long-term coal demand is still in adownward cycle due to: 1) China’s ongoing economic growth transitionfrom a highly energy-/resources-driven model to consumption-/servicesdrivenmodel; 2) the continued efforts to clean up pollution; and 3) furtheracceleration of supply side reform in coal downstream sectors includingcement, steel, nonferrous and power. After three consecutive annual coaldemand declines in 2014-16, we estimate China coal demand will declineanother 2% and 1% yoy in 2017E and 2018E, respectively.

A “planning economy” coal market benefits cement and steelGiven our expectations that the coal price likely will move within a narrowrange of RMB500-570/t (GSe average RMB550/t for 2017), coal downstreamsectors including cement and steel stand to benefit in 2017. We reiterateour Buy rating on CR Cement (on CL), BBMG (A/H, A-share on CL), AnhuiConch Cement (A/H), Magang (A/H) and Angang (A/H). We maintain Sell onChina Coal (A/H).