China
Slight relaxation of air pollution control for the upcoming winter. In Sep-18, China’s Ministry of Ecology and Environment and other commissions jointly issued an air pollution-control plan for the Beijing-Tianjin-Hebei region and surrounding areas for the fall and winter spanning 2018-2019. The new plan calls for a 3% reduction of PM2.5 and a 3% drop in the number of severely polluted days during the period from Oct-18 to Mar-19. Meanwhile, production schedules for the steel, coking, and foundry industries should take turns peaking to reduce air pollution. The production of steel in hot weather was limited to 50% of capacity in key cities. Other cities were told to cut production by no less than 30%. Enterprises that failed to follow these regulations would have their electricity cut.
Restriction on coal import remains. In Oct-18, NDRC held a six coastal provinces joint conference pertaining to coal import. The authority reiterated that the restriction on coal imports would be on par with last year. There is no new quota being issued.
Indonesia
Lifting 2018 domestic production target. In Sep-18, Indonesia raised the 2018 coal production target from c.485mn tonnes to c.507mn tonnes. The additional output quotas of 21.9 million tonnes are split among 32 coal miners and will be all exported. Indonesia’s coal consumption for power by PLN and independent power producers is expected to reach 88.5mn tonnes in 2018, below a target of 92mn tonnes. PLN expects coal consumption to increase to 96mn tonnes in 2019.
Facing a hurdle to ramp up production. In Sep-18, according to the interview with Pandu Sjahrir, chairman of the Indonesian Coal Mining Association, Producers in the world’s largest shipper face an order backlog of 18 months as they are not able to get hold of additional mining equipment. The slow ramp-up in supply will probably keep coal prices buttressed at about $100 a metric ton through the end of next year.
The China authority learned lessons from last winter’s coal-to-gas conversion program
It is expected to see another peak demand for coal in winter which is coming soon. China government simply imposed one solution for coal-to-gas conversion program last year to fulfil the target of a reduction of greenhouse and polluted gas emission. The program prohibits residents from using coal. Some thermal plants and steel mills in the north of China have to shut down. In retrospect, it was considered a failure. Hence, the authorities are now slowing down the pace of reduction rather than an abrupt cut in coal consumption this year. Since the demand for thermal power could surge in the near term, see Figure 3, the authority still aims to assure the profitability of domestic coal producers. Accordingly, the domestic production growth in China turned positive in Aug-18, see Figure 1. We believe the market players have started to stock up coal for winter. We cannot rule out the possibility that a new round of restriction on coal imports during winter. As of Sep-18, the port coal inventory continued to level up (+52% YoY), see Figure 6.
External demand favours the coal miners in Indonesia
In Jul-18, the coal exports reached a new high since Mar-14, arriving at 38mn tonnes in Indonesia, see Figure 2. With the increase in export target announced by the authority, the export demand will see new highs in 4Q18. However, the room for growth of production is limited due to the bottleneck of capacity resulting from equipment supply. We believe this is a short-term issue, and it will take 3 to 6 months to ramp up capacity. Though HBA started to correct from the high of US$107.8/tonne, the temporary shortage of supply will uphold the price in the near term. We expect HBA to average at US$100/tonne in 4Q18.
Coal counters monthly updates
Golden Energy and Resources (Target px: S$0.42 / BUY)
Geo Energy Resources (Target px: S$0.34/ BUY)
Investment action
We remain positive on the sector as we expect coal price (FY18e ASP 4,200 GAR: US$41/tonne, 1H18 ASP 4,200 GAR: US$48.6/tonne) will be favourable for coal miners. Meanwhile, the ramp-up of production is still on track. We maintain an OVERWEIGHT rating on the coal sector.
Peer comparison
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.
