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Comment of the Day

May 07 2013

Commentary by Eoin Treacy

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Thanks to a subscriber for this heavyweight report from CCB International focusing on Chinese utilities. Here is a section
Catalysts for coal-fired IPPs include
(1) achieving company targets of a decline in unit fuel cost, (2) capacity expansion coming back on track, and (3) stabilized power plant utilization. For wind IPPs, catalysts include (1) achieving annual newly installed capacity targets, and (2) substantial rebounds in utilization rates in 2013F.

Near-term upside risks.
Coal-fired IPPs: (1) weaker coal prices, (2) a stronger-than-expected recovery in utilization, and (3) weaker-than-expected hydropower generation that lifts coal-fired power utilization. Wind IPPs: (1) better-than-expected wind resources and the lifting of power grid curtailments, and (2) a rebound in CER prices that drives stronger-than-expected CDM income.

Eoin Treacy's view More than a few of the reports that have crossed my desk are predicting continued oversupply in China's coking coal sector. Coal miners have experienced a significant headwind as natural gas displaced coal in the USA's utility sector which freed up supply for export. Concurrently, demand for steel and coking coal have been sapped by Europe's lengthy recession and China's change of focus from infrastructure development to fostering human capital.

As a result a high degree of variability is now evident in the steel sector. Arcelor Mittal is representative of the downward pressure on steel prices. The share trended lower for three months from late January before finding support near €8.50 three weeks ago. It has since rallied to break the progression of lower rally highs, as it closes the overextension relative to the 200-day MA.

Vertically integrated steel producers such as Russia's Evraz and Brazil's Cia Siderurgica Nacional have been particularly weak and remain deeply oversold relative to their respective 200-day MAs.

Speciality steel producers have tended to outperform, not least because they occupy niches within the sector that offer security to earnings. Worthington Industries produces canisters for compressed gases, not least for CNG vehicles among a wider range of other products. The share broke out of an almost 20-year base in January and continues to extend the advance. A break in its progression of higher reaction lows would be required to begin to question medium-term upside potential. (Also see Comment of the Day on December 31 st ).

US listed Nucor has benefitted from the USA's competitive position in energy pricing and found support three weeks ago in the region of the 200-day MA.

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