What is the news?
In Nov-17, National Development and Reform Commission (NDRC) urged domestic coal suppliers and purchasers to enter into the medium and long-term contracts for 2018 to stabilize the development of both upstream and downstream sectors of the coal market. These term contracts are supposed to make up 75% of production and consumption of respective coal and power producers. Meanwhile, railways, ports and related logistics will prioritise the transportations under such contracts. NDRC will directly monitor contract fulfilment with volumes arriving at 200k tonnes or above.
In Nov-17, it’s reported that governments have revoked 406 coal-mining permits in East Kalimantan province, and another 403 permits are awaited to be revoked in the future. The move is associated with a nationwide cleanup of irregularities in the mining sector.
China is gradually subduing coal price volatility via regulating market mechanism
In retrospect, the coal price was still traded at the red zone in recent months, which is regarded as the abnormality (beyond 12% of a price base of Rmb535/tonne) according to the thermal coal price alert mechanism established in 4Q16, see Figure 5. It was apparently due to a shortage of coal supply to power plants. Since Jul-17, neither domestic production nor Indonesia coal import caught up with the growth of thermal power generation, shown in Figure 1 to 3. The authority adopted the same measure as what it did in late 2016, balancing coal supply and demand by term contracts, but it expanded the scale of by involving more parties as mentioned above. Therefore, with more visibility of coal supply and demand, we expect the upside of coal price is limited, and the price will fluctuate within the normalized range.
Stamping out irregularities will only cause regional temporary supply shorts
We believe the ongoing inspection and investigation of violations will only cause a minor speed bump in the mining sector. The national electrification project is a priority in Indonesia, and it will lead to a healthy and sustained demand for thermal coal. Hence, the stop-work resulted from licenses revocation will not sustain. Mining activities in the region will be resume once issues are rectified.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.59 / BUY)
Geo Energy Resources (Target px: S$0.44/ BUY)
In the recent months, each of three counter encountered 10% to 30% of price correction. We believe it was due to the bearish market sentiment on China’s coal demand：
However, we think the current headwind is seasonal since China has been intensifying the regulation and control of air pollution during winter. The shift from coal to gas is a long-lasting move which cannot be completed overnight. Moving forward, coal is still the main source of fossil fuel consumption.
Based on a stable coal outlook and the ramp-up of production of 40% in FY18, we maintain our BUY rating on coal sector.
Coal reserve estimate was as of 2016
*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