rated a buy

DEUTSCHE Bank has upgraded its earnings guidance for a swag of coal miners, including BHP Billiton and Rio Tinto, due to a possible rise in the thermal coal price over the next decade similar to iron ore's recent lift.

The German banks thermal coal team expects thermal coal prices to rise 26 per cent in the next two years to $US120 a tonne in the full-year 2012, on the back of a rise in net imports to China and India.

The seaborne thermal coal market is experiencing a transformation which may be as significant as that which occurred for the iron ore market over the past decade, analysts said.

Then, China grew from a marginal consumer of seaborne iron ore to a giant, representing nearly 50 per cent of the entire market.

In a similar way, we believe that China and India together could transform the demand landscape for thermal coal over the next decade; displacing the current, Western importers and evolving to dominate the industry.

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Analyst Brendan Fitzpatrick this morning upgraded Whitehaven Coal to a buy from hold & Macarthur Coal to a hold from sell.

Whitehaven and Centennial Coal are the banks preferred exposure, with the revised prices lifting valuations for the two by up to10 per cent, and Centennials earnings per share by up to 65 per cent in full-year 2012.

Analyst Paul Young also upgraded earnings for BHP and Rio, but said the increase of up to 5.5 per cent in 2012-13 was the most modest of the miners due to the size of their thermal coal businesses relative to their other divisions.

We believe the competition for capital with other divisions means BHPs energy coal growth pipeline is more limited than Xstrata and Anglo, he said.

After selling most of its domestic sales focused US assets, Rios coal division has increased its leverage to the higher-priced seaborne market. Xstrata, however, is the worlds largest thermal coal exporter and offers the most leverage to thermal coal pricing.

Deutsche reiterated its buy rating on both Rio and BHP and upgraded its price targets 1 per cent to 4 per cent, to $48 for BHP and $96.50 for Rio.