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Asia coal bonds due for reality check

Bonds of major Asian exporters of power-station coal have surged in the past month as a regional price benchmark for the commodity bounced off six-year lows. But with coal fundamentals fragile, a reality check looms for the debt market.

Physical thermal coal prices at Australia's Newcastle port , an Asian benchmark, have jumped 20 percent since the beginning of January, buoyed by expectations of near-term orders from key importers China and Japan. That lifted the bonds of Berau Coal Energy in Indonesia, the world's biggest exporter of coal used in power stations. The bonds were also lifted by a maturity extension in a corporate restructuring which included an equity injection. Bonds of domestic rival Indika Energy also rose, as well as those of Chinese producer Yanzhou Coal Mining.

The uptick has been a balm for indebted Asian miners whipped by a longer-term price slump and rising interest rates. Berau's total debt-to-earnings before interest, taxes, depreciation and amortisation (EBITDA) has worsened to 4.5 times at the end of September 2014 from 2.6 in 2012, according to Singapore-based financial research provider CreditSights. In other words, it would take 4.5 years for the company to pay down its debt completely assuming cash generation holds at the current pace.

But the coal rally is unlikely to last: China's longer-term demand is seen softening in the wake of an economic slowdown and the country's shift towards cleaner fuels, while Australian coal producers raise output. The coal market will probably get worse before getting better, said Macquarie's Colin Hamilton, who expects coal to average below $60 a tonne in 2015 before a modest recovery to $63 next year.

"There is s big divergence between some of the physical indexes and actual transactions. These occasional transactions are not representative of the actual market," Hamilton said. The London-based commodities analyst added that while declining oil prices have cut production costs for coal miners, the drop also means coal prices will need to come down even further to compete.

Source: Reuters