Karachi, November 12, 2012 (PPI-OT): Commodities have been volatile in the immediate aftermath of President Obama’s re-election.
According to AKD Securities, while the direction of the US$ will likely dictate commodities’ performance going forward, coal prices may take their cue from heightened environmentalism and substitution with natural gas. In this regard, President Obama has remained a staunch proponent of controlling carbon pollution and under his watch the EPA will likely accelerate new regulations concerning greenhouse gas emissions. Moreover, with the abundant availability of natural gas in the US at cheap also makes economic sense. Global equity market have been quick to price in these emergent dynamics – in the US, coal miners’ stocks were among the worst hit in the immediate aftermath of President Obama’s victory. From AKD Securities’ vantage, a decline in coal prices will likely lead to upward revision in earnings estimates for Cement manufactures where AKD Securities now anticipates LUCK and DGKC to post FY13F earnings of PKR 8.8 billion (EPS: PKR 27.2) and PKR 4.0 billion (EPS: PKR 9.17), respectively. AKD Securities’ target prices for LUCK and DGKC have consequently been upward revised to PKR 164.0 and PKR 64.9, respectively. As the local adage goes. “Lao Cement!”
The regulatory backdrop: With President Obama a staunch proponent of clean energy, the EPA took an aggressive stance against carbon emissions during his first term and legislations such as the Mercury Air Toxics Standard (MATS) and the Cross State Air Pollution Rule (CSAPR) were passed, although the latter was later suspended. The EPA is currently working on the ‘Standards of Performance for Greenhouse Gas Emissions for New Stationary Source: Electric Utility Generating Units’ thereby tightening the noose on greenhouse emissions. It is also believed that President Obama will eventually pass the CSAPR, dealing a blow to coal based power producers. All this point to soft global coal prices, particularly as the US is the world’s 2nd largest coal consumer. Int’l coal prices are down 31%CYTD to quarter level of US$86.5/ton (Last trade: US$83.7/ton) whiel coal miners’ stocks were among the worst hit in the US, in the immediate aftermath of President Obama’s re-election.
Substitution with cheaper gas: CY11 US gas reserves stood at 8.5tn cubic meters with shale gas resulting in both increased reserves as well as a considerable decline in natural gas prices – current gas prices in the US stand at US$2.86 per thousand cft vs. an average of US$7.98 per thousand cft in George W. Bush’s last year in office. The decline in natural gas price has proven to be a double whammy for coal, with the latter’s use already under constraint because of stricter regulations. From Pakistan’s perspective, although Thar coal reserves remain the focal point of long term GoP policy, the country will continue to remains reliant on imports in the interim. In this regard, the decline in coal prices bodes well for the country particularly its Cement producers.