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UPDATE 2-China coal firms to up output as prices rise, but margins squeezed

Published 03/28/2011, 07:09 AM
Updated 03/28/2011, 07:12 AM

* Shenhua lifts 2011 sales forecast to 360-370 mln tonnes

* Forecasts up to 10 pct rise in coal unit cost in 2011

* Says gross margin to come under pressure this year (Adds quotes, Yanzhou Coal)

By Farah Master and Wan Xu

HONG KONG/BEIJING, March 28 (Reuters) - China's major coal producers are ramping up production this year as global coal prices are set to firm further after Japan's quake sparked fears over nuclear power, though rising production costs will likely squeeze margins.

China Shenhua Energy Co Ltd , the country's largest coal producer, raised its coal sales forecast for this year, while Yanzhou Coal Mining Co Ltd aims to triple production over the next five years, top executives said on Monday.

"Global coal prices will hit a record high again this year and prices in China will trend upwards," Yanzhou Coal's Chairman Li Weimin told a news conference.

China's coal producers such as Shenhua, China Coal Energy Co Ltd and Yanzhou, will likely benefit from higher global coal prices after Japan's quake raised concerns over the use of nuclear energy, analysts said.

The coal market suffered short-term weakness after the early-March quake damaged port and shut power plants, forcing Japanese utilities to turn away cargoes, but the focus is now on recovery efforts, especially for several coal-fired power plants which may boost demand for coal.[ID:nL3E7EM09S]

Some analysts expect spot coal prices in China to rise 15 percent this year and 10 percent in 2012. Currently, China's thermal coal prices are trading around $120 per tonne. [ID:nTOE72L019]

Shenhua expects to sell 360 million to 370 million tonnes of coal in 2011, Chairman Zhang Xiwu told a news conference after announcing that its 2010 net profit rose by 20 percent. The latest sales forecast was up from 350 million tonnes previously.

PRESSURED MARGINS

In a separate briefing, Yanzhou Coal executives said the firm aimed to triple its coal output to 150 million tonnes in five years on rising demand in China, which relies on the commodity for 70 percent of its energy needs.

However, profit margins, now around 20-23 percent, will come under pressure this year due to rising production costs, analysts said.

"The gross profit margin for Shenhua and China Coal is likely to fall slightly in 2011 due to rising exploration costs and inflation on other costs," said Li Kun, a Shanghai-based analyst of Sinopac Securities.

"Yanzhou's gross profit margin, however, is likely to rise slightly as 70 percent of its coal is sold in spot prices, and it is boosting production on coking coal, which is more expensive."

Production costs would come under pressure from external factors in 2011, Shenhua's Zhang said, which will likely pressure margins.

"Pressure from production costs will intensify for two reasons we cannot control. One is that a resources tax may be implemented and the other is price adjustment funds collected by the government," he said. "These two factors are quite big, so we hope the (increase in) coal unit prices will be controlled within 10 percent."

Shenhua posted an October-December net profit of 8.65 billion yuan ($1.32 billion) versus 5.7 billion yuan a year earlier, based on Reuters' calculations using the company's announced full-year figures. Fourth-quarter earnings were largely in line with a consensus forecast of 8.8 billion yuan.

Rival Yanzhou Coal's net profit more than doubled in 2010.

Going forward, Shenhua's gross profit margin was likely to come under pressure, Zhang said, because of potentially unfavourable trading conditions with coal suppliers.

China's thermal coal import volumes were likely to fall on a year-on-year basis, Shenhua said, with spot prices in Asia Pacific remaining high and weakening the relative price edge of imported coal over domestically produced coal.

Shenhua's forward price-to-earnings ratio stands at 13.3 for 2011, higher than Yanzhou Coal's 11.3 but lower than Peabody Energy's 15.

On Monday, Shenhua's Hong Kong-listed shares closed up 0.43 percent, while Yanzhou Coal's Hong Kong shares rose 1.58 percent, both outperforming the main Hang Seng index's 0.39 percent fall. (Writing by Lee Chyen Yee; Editing by Ramthan Hussain)

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