Coal Mining Sector Update - 08 February 2021

COAL MINING SECTOR UPDATE

When the Party’s Over

Winter-Driven Price

•  Coal price has soared in late FY20 and early FY21 by +21.79% YoY/+4.84%YTD to USD84.4/mt.
•  As a seasonal commodity, coal demand is undoubtedly driven by the cold weather. However, winter is almost over. A slow decrease in coal price reflects this.
•  Subsequently, stock prices are already crawling down, as seen in exhibit 01, with ADRO being the laggard. We still expect a limited increase with the upcoming Chinese New Year until the end of February or early March as Spring emerges.
•  We estimate coal price to remain at USD85/mt in FY21E, considering the decline in global coal consumption. Most Western countries have retired their coal power plant and shifts to renewable energy. Thus, the eastern countries remain with China and India as the major coal consumer.

Chinese Coal: The Energy Conflict

•  Chinese coal import still rose by 1.33% YoY to 304 million ton, with Indonesia contributing 127 million ton (41.91%) in FY20, despite the coal cap on 300 million ton to meet demand amid a shortage of domestic coal.
•  The Government has put a price ceiling on coal at USD97.7/mt to anticipate price growth, so we believe the coal price will not go beyond that.
•  Contradicted with their aim to increase clean energy in FY30F, China approved the construction of 36.9 gigawatts of coal-fired power capacity in FY20.
•  Along with it, China has signed a trade agreement to buy 200 million tons of Indonesian coal in FY21E or equals 36.4% of the Indonesian coal production target in FY21E.
•  We see that these issues contrast with China's effort to cut coal import and consumption, but it will still secure Indonesia's coal export. 

Domestic Energy Focus

•  Indonesian coal production reached 558 million tons in FY20, equivalent to 101.40% from the 550 million target. The Government has set the same target for FY21E.
•  Meanwhile, domestic absorption (DMO) reached 132 million tons in FY20. The FY21E DMO target is set at 137.5 million tons or 25% of production at USD70/mt.
•  Around 70% of the domestic absorption are used by PLN to generate electricity through power plant as the major downstream project has not begun operation.
•  There are currently more companies on board for the downstream project, which turns coal into methanol, synthetic natural gas, and dimethyl ether (DME). In which ADRO joins the methanol project while PTBA is in the DME project.
•  Apart from that, cokes making, coal upgrading and briquetting are also a form of downstream that is already operating. However, the 0% royalty incentive will only be given to the major downstream projects.

NEUTRAL Recommendation with top Picks: ADRO IJ, PTBA IJ and ITMG IJ

We still stand with our NEUTRAL recommendation for coal as global consumption decline, while there is future potential in the domestic coal sector. We decide to revise our target prices: 1) ADRO IJ (BUY; TP: IDR1,450 previously IDR1,310) while having the most power plants, ADRO is in the gasification project with Pertamina as well. ADRO is currently traded at –1STD (5-year average) with PBV at 0.71x; 2) PTBA IJ (BUY; TP: IDR3,000 previously IDR2,390) as PTBA embark on another down streaming project, which is the activated carbon with a partner from Australia, apart from gasification and the potential acquisition of Paiton Power Plant. PTBA is currently traded at –0.5STD (5-year average) with PBV at 1.80x; 3) ITMG IJ (HOLD; TP: IDR13,800 previously IDR10,630) while benefited from the increasing coal price, ITMG still weigh heavily on export, therefore once winter is over, the export downtrend begins. ITMG is currently traded at –0.5STD (5-year average) with PBV at 1.10x. 

Disclaimer On    

ADRO, PTBA, ITMG