China
China restricted Australian coal imports. In Feb-19, Dalian Customs imposed an indefinite restriction on Australian coal imports and may implement a quota of 12mn tonnes of the overall coal import for 2019. Five ports under their supervision of the customs executed the ban. The volume of coal import across these five ports totalled at 14mn tonnes in 2018. Meanwhile, China has been slowing down the customs clearance of Australian coal by at least 40 days.
Approval for resumption of work in coal mines in Yulin City in Shannxi. Following the broad shut-down of coal mines for safety investigation due to the catastrophic accident in Jan-19, the Ministry of Energy of Yulin City announced the approval for resumption of mining work in the first batch of 49 mines with an annual capacity of 168mn tonnes in mid- Feb-19. By the end of the month, the second batch of 15 mines with an annual capacity of 35.6mn tonnes resumed as well.
Indonesia
Demand for Indonesian thermal coal heats up. The restriction of Australian coal imports resulted in a substituition for Indonesian coal. In 2018, China imported a total of about 72mn tonnes of Australian bituminous coal (higher CV) and 7.2mn tonnes of Indonesian bituminous coal. Though there is a limited quantity of high-CV coal in Indonesia, the domestic producers were receiving more inquiries from China in Feb-19. Meanwhile, some smaller scale high-CV producers are returning to the market.
Temporary supply shock boosted the coal imports but it’s unsustainable
The coal mine accident propelled the demand for seaborne coal due to the concerns of a supply shortage. In Jan-19, total coal import to China jumped by 19.5% YoY and 227.5% QoQ to 33.5mn tonnes. Indonesian coal imports surged by 16% YoY to a three-year new high of 16mn tonnes during the period. However, with the resumption of domestic production, the import volume fell in Feb-19. According to China Customs, total coal import plunged by 15.5% YoY and 47.3% QoQ to 17.6mn tonnes in Feb-19. The demand for seaborne coal could weaken in the upcoming month because port coal inventory was replenished as shown in Figure 6, and demand for coal is tapering when it comes to the end of the winter.
Indonesian coal has the potential to partially fill the supply gap
The current restriction on Australian coal import could create some opportunities for the Indonesia coal sector. China has been cutting the capacity since 2016 in accordance with the 13th-Five-Year Plan. In 2018, there were 5,800 mines shut down and more than 150mn tonnes of capacity phased out. In 2019 and 2020, China will continue to curtail the remaining 150mn tonnes of capacity to complete the goal of total 800mn tonnes capacity elimination under the plan. Hence, the demand for coal imports remains intact. The gap in domestic supply gap leaves room for Indonesia and Russia to fill it up. Though the current coal prices are depressed, the potential ramp-up of high-CV coal production could offset the price headwinds in part given the relatively low cash cost operation.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.36 / BUY)
Geo Energy Resources (Target px: S$0.245/ BUY)
Investment action
We are positive on the sector. The ramp-up of production is expected to be double digits for each of the two coal counters this year while the expected average coal price (4,200 GAR: US$ 39.5/tonne) in 2019 will be 10% lower than that in 2018. Therefore, the overall performance will continue to improve due to the growth of output offsetting the decline in ASP. We maintain an OVERWEIGHT rating on the coal sector.
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Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.
The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.
