JSW – Met Coal Suppliers Hit by Smelter Lockdown
Global steel demand is set to slump dramatically in the coming months, led by reduced orders from the transport industry, which accounts for 25% of total demand, following plant closures by major automakers (VW, PSA, Daimler, BMW), alongside expected disruptions in construction (40% of global use) during coronavirus quarantine measures. In response, steel suppliers are scaling down production through plant closures (Arcelor, Salzgitter, ThyssenKrupp) or stalled restarts of idled furnaces (Arcelor's Polish facility in Krakow is one example), signaling bearish prospects for the European steel industry and its supply chain, including coke producers like JSW, that might last at least through the first half of the year. To reflect this, we cut our 2020 coal production forecast for JSW by 7% to 14.2mmt, indicating a 4% reduction from last year. We also currently expect that the Miner will have to mark its 2020 sales prices for coking coal down by about 5% relative to market rates, i.e. to an average of $150/t (note the upward revision in the expected average price in zlotys to reflect a stronger dollar). Amid weak demand from steel mills and power plants (Polish electricity consumption went down by about 10% in the time since the coronavirus outbreak), by December 2020 JSW's inventories will have most likely climbed to 2.5mmt (+100% vs. the old forecast). Using these assumptions, on estimated EBITDA of PLN 600m, we expect low OCF of PLN 100m in 2020, combined with negative FCF in the amount of PLN 1.6bn, implying an ending net debt balance of PLN 390m. We also assume that JSW will push the planned launch of the Bzie-Dębina hard-coal mine back from 2022 to 2023. On the revised outlook, we downgrade JSW from hold to buy, with the 9-month price cut from PLN 15.34 to PLN 9.78 per share.
Jastrzebska Spolka Weglowa is a producer of type 35 coking coal (“orthocoking coal” according to Polish Standard). The main line of Co.'s business is also the mining and sales of steam coal. Co. is also central for selling all coal derivative products, i.e. coke and hydrocarbons produced by coking plants owned by the JSW S.A. Capital Group. The mining area is located in the Upper Silesian Coal Basin. The principal clients for Co.'s products are located primarily in Poland, Germany, Austria, the Czech Republic, Slovakia, and also India and Brazil.
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