MARKETS: Yancoal's cold prospects

Yancoal has borne the brunt of the global oversupply of coal and a weakening Australian dollar, driving the company into a heavy loss.

Yancoal’s ASX statement does not make pleasant reading for those long on the stock or coal. The company’s $1.04 billion loss in the first six months of 2013 occurred despite increased coal sales. Yancoal warns coal demand is flat at best. Oversupply is still the name of the game for both thermal and metallurgical coal. The Australia’s dollar’s slump against the US currency, down 14 per cent since April 11, has alleviated some pressure, but “production cuts are required to underpin sustainable price recovery”, said Yancoal.

There may be little hope of that happening. Australian and Canadian metallurgical coal miners have focused on cost cutting but not on production cuts. In fact, they have boosted production in the hope Chinese steel mills will regain their former mojo. There has been some restocking by Chinese steelmakers but not enough to boost prices to make business profitable.

Industrial action in Australian and Colombian coal mines has not increased the price of thermal coal, used by largely by power stations. Like the metallurgical coal market, the thermal coal market is bursting with supply. There are no significant plans for the world’s major coal miners to cut thermal coal production. The Chinese market is weak. Stockpiles are high and foreign coal producers have to deal with competition from China’s own mines.

Yancoal is targeting a cash cost reduction this year of 15 per cent over the first six months of 2012. The company may have to target an even more ambitious decrease in costs if it is to crawl back into the black. Investors are wary of the stock. Yancoal shares have slumped 28 per cent this year. The stock is trading at a price to book value of just 0.39. It would be a brave investor who bets on Yancoal shares given the company’s outlook.