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"We believe the demand-supply balance for coal is becoming moderately more favourable across the region," said Standard & Poor's credit analyst Xavier Jean. "China's growing electricity consumption after several months of decline, and higher demand from India and Indonesia should support demand for thermal coal this year," he said in the report.
The weakness in prices over the past 6 months may also slow down the pace of growth in thermal coal supply over the next 12 months.
Early signs of more stable steel demand in China could limit any further material downside in coking coal prices in 2013. However, still-high supply growth will likely limit the upside to prices in 2013, barring significant supply disruptions due to weather-related issues.
Yet, it will take some time for stabilising industry conditions to translate into improved financial performance at the coal companies, the report noted. It generally takes 2-3 quarters before changes in benchmark coal prices are reflected in the profitability of coal companies. This is because prices for most long-term supply contracts are either fixed or are partly floating. Still, we expect the companies' focus on cutting costs and growing production and sales volumes to limit material further downside risk from weaker coal prices.
Standard & Poor's expects upside potential to the industry's credit profile to be limited in the next 12 months.
"The free operating cash flows of most Asia-Pacific coal companies are likely to return to moderately positive levels in 2013. But we believe this will be insufficient to immediately stabilise their credit profiles," said Jean. "Sizable debt-funded capital spending since 2010 increased the debt levels for coal companies and will likely limit material deleveraging over the next 12 months," he added.
