Coking coal deficit seems inevitable
High grade coal (coking coal) demand will continue to outpace supply in 2017, ending two years of oversupply condition. Demand from China, India and Japan steel markets remains buoyant, but supply is expected to decrease due to China’s coal production cut since mid-2016, creating a global coking coal deficit. Global coking coal price starts to rally to USD130/Mt in June 2016 and remains above USD160/Mt since September. If demand, propelled by rising imports from the three aforementioned countries, can continue to increase, USD130/Mt could remain a floor up to end 2017. We foresee that ADRO will be benefitted, as they start to produce coking coal from newly acquired mine site, Haju Mine.
Lower equilibrium for Thermal coal
Extreme La Nina, which may last for as long as two years, in early 2017 is expected to disrupt production in Australia and Indonesia. Moreover, China’s recent efforts to cut pollution by slashing domestic coal production will send global supply lower to 800 mn tons in 2017. Furthermore, demand, dragged by under-utilized power plants in China and India, is also estimated to decline. As a result, a lower equilibrium may occur in 2017, with oversupply stubbornly persist albeit in a lower level compares to 2016 period. After being languished to near decade low in early 2016, we foresee coal price average is USD75/Mt in 2017.
Demand from domestic keeps staggering
According to the Government’s schedule, construction of around 2,538 MW of new coal-based power plants will be completed by the end of 2017. Based on our calculation, that will translate into another 10.1 mn of coal requirement on top of the already high requirement of 25.5 mn tons in 1H16, not taking into account cement production capacity is expected to spike to 108.8 mn tons.
U.S. carbon emissions program face challenges
A year ago, the Obama administration has issued a regulation requiring 32% reduction in power-plant carbon emissions by 2030. However, it is now facing a courtroom showdown led by industry associations as the challengers claimed that the regulation was passed without congressional authorization. This court fight will further slow down the current carbon reduction program and if the challengers win, it will bring supporting winds for coal industry.
Limited capex; limited bank loan
Except for miners that diversify their business into power plants, the surging coal price will not be automatically translated into higher capex. Pure mining and quarrying companies will be very wary on capex spending as they suspect that current coal price hike phenomenon is not sustainable enough. Additionally, Indonesian banks will remain nonetheless cautious with those pure miners, as they played parts in the increasing NPL this year.
Higher revenue and margins? Yes
Capitalizing on expected higher coal prices, we see higher revenue on the horizon for coal mining companies. Underpinned by Chinese Government’s intention to keep coal prices at USD67 – USD75/Mt, production is expected to build up, ranges to around 400–450 mn tons. Meanwhile, consistent oil oversupply condition perched oil price between USD40/barrel to USD50/barrel. Thus, we expect fuel cost contribution to revenue to be lower than of that in 2016.
Moratorium for industry consolidation
The Ministry of Energy and Mineral Resources announces that the coal mine moratorium regulation will soon be issued. We view a consolidation phase will start as uncertified and royalty reluctant miners will reduce. It will also provide opportunity for business and government to assess current coal reserves.
Our top picks
We like PTBA and ADRO as we like their 1) higher profitability margin and low leverage profile, 2) most exposed to medium-low rank coal, which has a huge potential from domestic demand, 3) vertical business integration, including power plants.
