Starting to Calm Down
Domestic Coal Policy: PP No 37/2018 and PP No 23/2018
The Government of Indonesia has reduced coal mining company income tax to 25% from an
original 45%, with an additional deduction of 10% from the acquisition of net profits for holders of
Mining Operations Special Mining Permits (IUPK OP) listed in PP No. 37 of 2018. This new policy will
alleviate coal mining producers’ tax burden, thus definitely pumping up companies' net profits. In
addition, the government plans to revise PP No. 23 of 2018 regarding coal mining licenses, where
producers can extend their Contract of Work (Kontrak Kerja/KK) in 2 years before it expires. In this
regard, the government plans to accelerate the extension of the permit to 5 years before the KK is
completed, so that producers can extend their KK faster. Mining companies can also convert KK into
IUPK OP, so they can benefit from declining corporate income tax
Potential Demand from China, but...
China's coal production only increased1.62% YoY in 10M18, as a result of their policy to limit coal
mine production – demand for coal was still high with winter is coming, reflected in China's coal
imports which rose 11.07% YoY in 10M18. Production quotas tends to be limited, but a huge
demand boosts more imports into China. Winter also has the potential to encourage the use of
heating units, hence will increase electricity consumption, which is projected to potentially grow by
12.52% YoY to 7.10 trillion Kwh in FY18E (vs. 6.31 trillion Kwh in FY17).
...China Thermal Coal Cuts Import in the Early 2019
There is no strong catalyst to drive coal demand at this time. Even though Chinese coal imports is
rising, but overall coal demand only grew by 1.62% YoY in 10M18. Thus, the prospect of more coal
imports in 2019 is looking unlikely; China reportedly imposed coal import quota restrictions to
extend until mid-1Q19. Coal imports this year were set at no more than 270.9 million tons of total
in 2017. The quota limitation aims to limit thermal coal imports, which will have a significant
negative impact on the price of thermal coal until the Chinese government fulfills its import quota.
This not only has a negative impact on prices, but also has the potential to reduce the volume of
Indonesia’s coal export, because around 13% -20% of domestic coal companies’ exports are
allocated to China.
Neutral Recommendation with Top Picks: ADRO and PTBA
Coal issuers have the potential to achieve positive performance growth driven by a projected
increase in demand for 2H18; the average price of coal is still above US$100/mt, and the USDIDR
rate is at IDR14,600. However, China's coal import quotas and increased use of renewable energy
have the potential to hamper coal consumption growth and decrease coal prices. Therefore, we
recommend NEUTRAL for the coal mining sector with top picks ADRO (TP: IDR1,900 and PTBA)
