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ANALYSIS: Coal sector gets hotter
Attendance at the recent Coaltrans Asia Conference in Bali has upgraded the Indonesian sector rating from “underweight” to “neutral” on the back of likely limited coal-price downside from current levels as global demand (see Exhibit 2) is soon expected to outstrip supplies
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Attendance at the recent Coaltrans Asia Conference in Bali has upgraded the Indonesian sector rating from “underweight” to “neutral” on the back of likely limited coal-price downside from current levels as global demand (see Exhibit 2) is soon expected to outstrip supplies.
The 2016 coal demand of 862 million metric tons is expected to outstrip supplies amounting to 846 million metric tons, according to a Coaltrans panellist. This condition is expected to persist through 2020, helped by increasing demand from North Asia, excluding China.
On the supply front, 2016 production is expected to fall 3 percent year-on-year (yoy), with China cutting production in an effort to lower its emissions. China’s coal-fired power market is forecast to drop from 71 percent in 2015 to 59 percent in 2020. In April 2016, China’s thermal power-plant output was down by 6 percent yoy to 328.9 terawatt hours (TWh), while its hydro-power output rose 10 percent yoy to 77.9 TWh.
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 280 million metric tons, a flat 0.3 percent yoy. 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 at US$48.5 per metric ton in April 2016, with current prices up 10 percent to $53.3 per metric ton. Some experts at the conference voiced an expectation that future coal prices would rise by $1 to $2 per metric ton, in line with a conservative long-term coal price forecast of $48 per metric ton. Risk to this view would be continued volatility in global oil prices as this may affect sentiment regarding the coal sector.
Closer to home, Energy and Mineral Resources Minister (ESDM) Sudirman Said, through his representatives, has requested that Indonesian coal producers support the government’s 35,000 megawatt (MW) electricity procurement project, which is crucial for the local coal industry’s future development.
However, based on a Coaltrans participant survey, about 63 percent of conference participants believe that the 35,000 MW project will be completed in 2022, three years behind the government’s 2019 target. Land acquisitions, permits and financial closures were considered to be the obstacles, according to the survey.
ESDM projects that Indonesian local demand will take up 60 percent of Indonesia’s total coal production in 2019, equivalent to 240 million metric tons, up 79 percent yoy from the 2015 domestic demand level (see Exhibit 3). State-owned electricity firm PLN is likely to be the biggest offtaker, followed by cement and fertilizer companies (see Exhibit 1). ESDM is currently in discussion with coal producers and PLN to implement cost-plus margin, currently proposed at 15 to 25 percent for coal pricing destined for power plants.
With regard to stock picks, Tambang Batubara Bukit Asam (PTBA) is the preferred coal-mining play, according to Bahana Securites, due to the firm’s high portion of local coal sales and long-term purchase commitments from PLN.
With regard to coal-contractors, Bahana Securities reiterates its “buy” call on United Tractors (UNTR), of which 80 percent earnings are coal-related, paving the way for its attractive valuation on 4.1 times of forecast 2016 EV/EBITDA (enterprise value divided by earnings before interest, tax, depreciation and amortization).
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The writer is a research analyst at Bahana Securities
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