What is the news?
On 16-Apr, the authority re-imposed a new round of restriction on coal imports at southern and eastern ports located in Zhejiang, Fujian, Guangdong, and Guangxi provinces. The regulations ranged from bans on unloading to tighter customs clearances. It is viewed as supporting the domestic coal prices and re-channelling profits back on domestic producers.
According to Platts, Indonesian coal miners reported health average selling price (ASP) in 1Q18. The growth of ASP was attributable to strong demand from China and weather-related supply disruptions. 1Q18 production from Adaro Energy, the largest coal miner in Indonesia, dropped by 8% YoY, while Bukit Asam, another coal giant reported an 18% YoY jump in production.
The cooling measure is seasonal
In retrospect, the initiation of the ban on imported coal through small ports was in Jul-17. It persisted until the end of the year. However, the extreme winter climate led to a surge in demand for coal. During that period, the domestic production failed to catch up, resulting in more reliance on imported coal since Dec-17, Shown in Figure 1 and 2. In early 2018, the Big 4 power generators urged to loosen the control on imported coal, and the authorities relented in Feb-18. As shown in Figure 2 and 3, the jump of power demand aligned with the rebound of imported coal in Jan/Feb-18. The new round of restrictions is to protect the domestic coal miner’s interest given the domestic capacity is relatively sufficient to cater to demand during the slack season. It is worth noting that the restrictions are mainly imposed on small ports rather than the large ports. Import volume from small ports accounts for less than 30% of the total amount. China still relies on imported coal to fill the demand gap. We believe the restriction is to maintain the domestic coal miners’ market share amid a healthy supply-demand dynamic.
Coal price topped out in 1Q18
See Figure 3 and 4, the uptrend of coal prices starting in Jul-17 lasted for 9 months until Mar-18. The HBA index reached 6-year high, so did Qinghuangdao 5,500 GAR FOB price in 1Q18. In Apr-18, Coal prices started to correct (down c.10% MoM) due to a moderation in demand after winter. Accordingly, more supply began to build up. Shown in Figure 6, the port coal stockpile surged in Mar/Apr-18. We believe the seasonal correction of price is healthy given the recent coal price level have created untenable pressure on both China and Indonesia thermal plants for months. This implies less intervention by authorities on behalf of these utilities.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.48 / BUY)
Geo Energy Resources (Target px: S$0.47/ BUY)
We remain upbeat on the sector as we expect coal price (FY18e for 4,200 GAR: US$40/tonne, 1Q18 4,200 GAR: US$52.4/tonne) will be favourable for coal miners. Meanwhile, the ramp-up of production is still on track. The risk worth drawing attention to is the monsoon season that could cause some disruption to operations. We maintain BUY rating on coal sector.