Coal Sector Outlook

Oversupply to persist

Lower GDP growth forecast for China to 6.3% in 2016 signaling bleak outlook. Longmay Mining Group, the largest coal mining company in northeast China, will lay off 100k employees, about 40% of its current workforce. Attempting to make a massive energy swift from coal to gas, China may become net exporter of coal within 20 years, in our view.

Indonesia power plant still takes more time from initial schedule

Under gloomy outlook, Indonesian coal miners aims to become a major player in the domestic power generation business and make partnership and joint venture program to participate in ambitious government’s 3-4 mn tons of coal annually. Indonesian coal miners will persistently facing supply and demand balance to stabilize the new equilibrium.

Strip ratio diet

Major cut of stripping ratio, cost efficiency, as well as limitation for high calorific coal production become the main agenda for coal sector this year. Land procurement for power plant is relatively slow. However, cash cost in USD tends to decline given depreciating rupiah, which brings bargaining power for coal miners to make another renegotiation with the contractors.

Margin fall keep haunting

Going forward, as we lower our avg. coal price assumption to USD 62 / ton, avg. gross margin tends to decline by 1-2 percentage points in 2016. Power plant project will add pressure for the company given the capital expenditure coming from USD loan.