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Stock Index
Bahana Securities

18 Dec 2018 | 02:42 WIB
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Currencies
Bahana Securities

18 Dec 2018 | 02:42 WIB
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Coal Sector Gets Hotter

Our attendance at the recent Coaltrans Asia Conference in Bali has us upgrading our Indonesian sector rating from Underweight to NEUTRAL on the back of likely limited coal-price downside from current levels as global demand (exhibit 2) is expected to outstrip supplies going forward.

Based on one of the panellists at Coaltrans, 2016 coal demand of 862mn mt is expected to start outstripping supplies which amount to 846mn mt.  This condition is expected to persist through 2020, helped by increasing demand from North Asia ex-China (ie, Japan and South Korea).

On the supply front, 2016 production is expected to fall 3% y-y caused by China’s production cut to lower its emissions. Note that China’s market of coal-fired power plant electricity generation is forecast to drop from 71% in 2015 to 59% in 2020. In April 2016, China thermal power-plant output was down by 6% y-y to 328.9TWh, while hydro-power output rose 10% y-y to 77.9TWh.

The Chinese government is focused on cutting production by closing uneconomical and small coal mines, while China Shenhua, a state-owned coal miner, plans to maintain its production target of 280m mt, flat 0.3% y-y. Thus, market conditions are allowing larger producers to charge higher prices without cutting their output. We expect limited downside on coal prices ahead.

Note that prices bottomed back in April 2016 at USD48.5/mt, with current prices up 10% to USD53.3/mt. However, at this stage, some experts at the conference only expect future coal prices to only rise by USD1-2/mt, relatively in line with our conservative long-term coal price of USD48/mt.  Risk to our view would be continued volatility in global oil prices which may affect sentiment on the coal sector.

Closer to home, there was a clear message from the Minister of Energy & Mineral Resources (ESDM), Sudirman Said, through his representatives was that Indonesian coal producers must support the 35GW project,  which is crucial for the local coal industry's development ahead.

However, based on Coaltrans’ survey of the participants, about 63% believe that the 35GW project to be completed in 2022, 3 years behind the 2019 target with land acquisitions, permits and financial closures considered to be the obstacles.

ESDM projects that in 2019, Indonesian local demand will take up 60% of Indonesia’s total coal production or equivalent to 240m mt, up 79% y-y from the 2015 domestic demand level (exhibit 3). State-owned electricity firm PLN is likely to be the biggest offtaker of the increasing local demand, followed by cement and fertilizer companies (exhibit 1).  ESDM is in discussion with coal producers and PLN to implement cost-plus margin, currently proposed at 15-25% for coal pricing destined for power plants.

On stock picks, we continue to like PTBA as our preferred coal-mining play, due to its high portion of local coal sales and long-term purchase commitments from PLN, Indonesia’s biggest coal offtaker. Separately, on coal-contractors, we reiterate our BUY call on

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