US pricing remains cornered by market and regulatory forces, the broker said in a report.
“With limited line of sight to a meaningful near-term recovery in gas prices and thermal supply not being reduced at the requisite pace we anticipate continued pressure on thermal coal prices,” it said.
“Metallurgical coal is also being impacted by high steel import levels and low domestic steel mill capacity utilization. We now expect the US coal space to remain in a prolonged state of oversupply, and reduce our US coal price forecasts by a similar magnitude to our seaborne price cuts.”
Liquidity also weighs on coal equities, UBS said.
“Aside from supply rationalization, we believe there is limited cost reduction potential left in the US coal production base today,” it said.
“Any recovery in gas prices may come too late for the highly levered US coal players, and even those with healthier balance sheets are having damage progressively inflicted as higher price legacy multi-year contracts roll off, cash burn continues, and utilities reduce forward coal purchases.”
“We reduce our target on Peabody Energy 82% to $US6.00 and downgrade to ‘sell’. We cut our target on Arch Coal 67% to $0.50 and maintain our ‘sell’ rating. We reduce our target on Cloud Peak Energy 55% to $2.50 and downgrade from ‘buy’ to ‘sell’.”