China
144mn tonnes of new capacity added in 1Q19
National Development and Reform Commission and associated authorities approved the resumption of work for 29 mines with a total capacity of 177mn tonnes, and 144mn tonnes of which were new capacities in 1Q19. The mines are mainly located in North and Northwest China, producing thermal coal.
Expecting 30% growth of domestic coal transport capacity by rail
In Apr-19, China Railway Economic and Planning Research Institute announced that the coal transportation capacity by railway would increase 650mn tonnes to 2.8bn tonnes (75% of the national production) or have a 30% growth by 2020. Coal production will continue to be consolidated within Shanxi, Shannxi, and western part of Inner Mongolia.
Indonesia
Firmer approach to ensure domestic obligation is met
According to the interview with the Indonesian Coal Mining Association’s executive director by S&P Global Platts, the government wants to closely control the production output for the first time. However, there is difficulty in implementing the policy due to the lack of coordination between the local governments. The DMO requirement for 2019 could be higher than 25% which was the quota for 2018.
China boosted domestic coal supply, associating with import restriction
The restriction on seaborne coal remains. Apart from Australian coal, the clearance for Indonesian coal at northeastern China ports was delayed in Apr-19. China has been reducing its reliance on coal imports which reached a 5-year peak of 281mn tonnes last year. Domestic coal demand is growing at a milder pace, in line with the overall economy in China. The tactical increase in supply and transportation capacity is to supplement the shortfall due to the reduction of coal import and narrow the price gap between land-borne and seaborne coal respectively. However, the strategic clampdown on coal production and consumption will carry on domestically.
The mitigation of price headwinds throughout the Indonesian approach is limited
Coal selling price is more critical for business operation and performance. The current unfavourable price hampers the ramp-up of production given the thinner margin that miners will now suffer. The DMO imposes sales quota and a price cap. So it has little help on reliving pressures from operational difficulties.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.30 / BUY)
Geo Energy Resources (Target px: S$0.22/ ACCUMULATE)
Investment action
We are still positive on the sector. The ramp-up of production is expected to be moderate for each of the two coal counters this year while the expected average coal price (4,200 GAR: US$ 39.5/tonne) in 2019 will be 10% lower than that in 2018. Meanwhile, the cash cost will also decline due to the normalisation of stripping ratio. Therefore, the overall performance could slightly improve because of margin improvement. We maintain the OVERWEIGHT rating on the coal sector.
Peer comparison
Coal reserve estimate was as of 2016
*Agritrade Resources: financial year ends in March, and coal reserve estimate was as of Mar-18
**Harum Energy: coal reserve estimate was as of 2009
***Baramulti Suksessaran: coal reserve estimate was as of 2012
Phillip Coal Tracker: Our snapshot of coal markets
Figure 1: Monthly coal production in PRC grew slightly
Source: National Bureau Statistics of PRC, PSR
Figure 2: Growing coal import from Indonesia to China
Source: Bloomberg, PSR
Figure 3: China hydro power supply spiked YoY in Mar-19
Source: National Bureau Statistics of PRC, PSR
Figure 4: HBA dropped to a 20-month low
Source: Coalspot.com, PSR
Figure 5: Qinhuangdao 5,500 GAR weekly FOB spot price
Source: Bloomberg, PSR, NDRC price zones (red/blue/green)
Figure 6: Total port coal inventory declined recently
*Source: Bloomberg, PSR
*The total port coal inventory includes coal stockpile at Qinghuangdao Port, Tianjin Port, Caofeidian Port, Guangzhou Port, Jingzhou Port, Lianyungang Port, Dandong Port, Jingtang Port, Yinkou Port, Qingdao Port, and Huanghuagang Port.
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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.
