China
Room for 180mn tonnes of capacity cut during 2019-2020
In May-19, CCTEG Coal Industry Planning Institute published the Mid-term 13-Five-Year Plan Evaluation and Outlook for Coal Industry, stating that 810mn tonnes of capacity were phased out during 2016-2018. There is still room for 180mn tonnes of capacity curtailment during 2019-2020. Total coal production will reach 3.7bn tonnes out of 4.5bn to 4.7bn tonnes of domestic capacity by 2020 with an utilisation rate of 75%. The overcapacity issue will be resolved amidst increasing market consolidation. The number of coal mines will decline to 5,000, and 82% will be the large mines (more than 120mn tonnes of annual production).
Indonesia
Indonesia and China coal associations collaborate in the coal mining sector
In May-19, the Indonesian Coal Mining Association and China National Coal Association signed a memorandum of understanding (MOU) to cooperate in the development of the coal mining sector. Both parties will build a framework of cooperation in coal mining and utilisation, development of environmental technology and personnel exchanges. The MOU also provides certainty on China coal import policy on Indonesian coal.
The authority rejects calls for DMO reduction
In May-19, the Indonesian government rejected calls from miners for a reduction of in Domestic Market Obligation (DMO), which demands that the local producers supply 25% of the output to the domestic market. Companies that fail to meet the DMO need to purchase quota from other producers who deliver more than 25% of supply. Miners can only purchase DMO quota from others from July onwards.
Ongoing clampdown on capacity and market consolidation support coal prices
The supply-side reform to phase out 800mn tonnes of coal capacity is completed two years in advance. However, the authority signals it intends to tighten further the domestic supply growth. The large-sized producers will continue to increase the market share in terms of output. With the encouragement of mid-to-long term coal purchase agreement between coal and power enterprises, China will rein in coal prices more efficiently. The policies concentrate on capping the upside of prices. The MOU could provide relief over concerns in the reduction on Indonesian coal demand given that the restriction on coal import (mainly on Australian coal) that remains at the moment. On average, China imports 120mn to 130mn tonnes of Indonesian coal annually.
Indonesian government policies are more volume-driven
Indonesia is expected to grow the domestic consumption of coal by 20mn tonnes to 135mn tonnes in 2019. The unchanged DMO is in line with the ambitious infrastructure expansion plan with a budget of more than US$400bn. The government foresee growth in the domestic demand for coal. However, the authorities will not take care of the downside of coal price. Producers have to ramp up the output despite the thin margins to maintain or improve profitability. This will hurt the miners with smaller reserves and more dependence on the export market.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.24 /ACCUMULATE)
Geo Energy Resources (Target px: S$0.15/ NEUTRAL)
Investment action
The ramp-up of production is expected to be moderate for both of the coal counters this year. Expected average coal price (4,200 GAR: US$ 39.5/tonne) in 2019 will be 10% lower than that in 2018. Meanwhile, the cash cost will also decline due to the normalisation of stripping ratio. The thinner margin will offset the growth of production. Therefore, the profitability will be flat in 2019. We downgrade our recommendation to HOLD on the sector.
Important Information
This report is prepared and/or distributed by Phillip Securities Research Pte Ltd ("Phillip Securities Research"), which is a holder of a financial adviser’s licence under the Financial Advisers Act, Chapter 110 in Singapore.
By receiving or reading this report, you agree to be bound by the terms and limitations set out below. Any failure to comply with these terms and limitations may constitute a violation of law. This report has been provided to you for personal use only and shall not be reproduced, distributed or published by you in whole or in part, for any purpose. If you have received this report by mistake, please delete or destroy it, and notify the sender immediately.
The information and any analysis, forecasts, projections, expectations and opinions (collectively, the “Research”) contained in this report has been obtained from public sources which Phillip Securities Research believes to be reliable. However, Phillip Securities Research does not make any representation or warranty, express or implied that such information or Research is accurate, complete or appropriate or should be relied upon as such. Any such information or Research contained in this report is subject to change, and Phillip Securities Research shall not have any responsibility to maintain or update the information or Research made available or to supply any corrections, updates or releases in connection therewith.
Any opinions, forecasts, assumptions, estimates, valuations and prices contained in this report are as of the date indicated and are subject to change at any time without prior notice. Past performance of any product referred to in this report is not indicative of future results.
This report does not constitute, and should not be used as a substitute for, tax, legal or investment advice. This report should not be relied upon exclusively or as authoritative, without further being subject to the recipient’s own independent verification and exercise of judgment. The fact that this report has been made available constitutes neither a recommendation to enter into a particular transaction, nor a representation that any product described in this report is suitable or appropriate for the recipient. Recipients should be aware that many of the products, which may be described in this report involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made, unless all such risks are understood and an independent determination has been made that such transactions would be appropriate. Any discussion of the risks contained herein with respect to any product should not be considered to be a disclosure of all risks or a complete discussion of such risks.
Nothing in this report shall be construed to be an offer or solicitation for the purchase or sale of any product. Any decision to purchase any product mentioned in this report should take into account existing public information, including any registered prospectus in respect of such product.
Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may provide an array of financial services to a large number of corporations in Singapore and worldwide, including but not limited to commercial / investment banking activities (including sponsorship, financial advisory or underwriting activities), brokerage or securities trading activities. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have participated in or invested in transactions with the issuer(s) of the securities mentioned in this report, and may have performed services for or solicited business from such issuers. Additionally, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may have provided advice or investment services to such companies and investments or related investments, as may be mentioned in this report.
Phillip Securities Research or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report may, from time to time maintain a long or short position in securities referred to herein, or in related futures or options, purchase or sell, make a market in, or engage in any other transaction involving such securities, and earn brokerage or other compensation in respect of the foregoing. Investments will be denominated in various currencies including US dollars and Euro and thus will be subject to any fluctuation in exchange rates between US dollars and Euro or foreign currencies and the currency of your own jurisdiction. Such fluctuations may have an adverse effect on the value, price or income return of the investment.
To the extent permitted by law, Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may at any time engage in any of the above activities as set out above or otherwise hold an interest, whether material or not, in respect of companies and investments or related investments, which may be mentioned in this report. Accordingly, information may be available to Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, which is not reflected in this report, and Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited to its officers, directors, employees or persons involved in the issuance of this report, may, to the extent permitted by law, have acted upon or used the information prior to or immediately following its publication. Phillip Securities Research, or persons associated with or connected to Phillip Securities Research, including but not limited its officers, directors, employees or persons involved in the issuance of this report, may have issued other material that is inconsistent with, or reach different conclusions from, the contents of this report.
The information, tools and material presented herein are not directed, intended for distribution to or use by, any person or entity in any jurisdiction or country where such distribution, publication, availability or use would be contrary to the applicable law or regulation or which would subject Phillip Securities Research to any registration or licensing or other requirement, or penalty for contravention of such requirements within such jurisdiction.
This report is intended for general circulation only and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The products mentioned in this report may not be suitable for all investors and a person receiving or reading this report should seek advice from a professional and financial adviser regarding the legal, business, financial, tax and other aspects including the suitability of such products, taking into account the specific investment objectives, financial situation or particular needs of that person, before making a commitment to invest in any of such products.
This report is not intended for distribution, publication to or use by any person in any jurisdiction outside of Singapore or any other jurisdiction as Phillip Securities Research may determine in its absolute discretion.
IMPORTANT DISCLOSURES FOR INCLUDED RESEARCH ANALYSES OR REPORTS OF FOREIGN RESEARCH HOUSE
Where the report contains research analyses or reports from a foreign research house, please note:
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.