Coal Sector: How bad is bad?
Coal was the laggard sector in 2012 and we don’t expect much improvement in 2013 given that demand is likely to remain weak with supply rebalancing from the Atlantic (Colombia and the US). Given this, most coalminers in Indonesia have reduced production and taken cost efficiency measures in an effort to survive the current environment of low coal prices. This does not auger well for earnings. Hence, we initiate coverage with an UNDERWEIGHT recommendation on the sector.
No signs of recovery so far
The coalmining sector in Indonesia was the laggard in 2012, slumping 26% as coal prices dived 20%. The weak coal prices owed to: 1) the oversupply of thermal coal - mainly from the Atlantic (Colombia and the US), 2) weaker demand given global economic headwinds. The YTD average price has already dropped to $91/ton despite rebounding on short-term supply disruption (from Australia and Columbia ) and then declining again below $90/ton in the past 2 weeks. Moderate
coal price increases can be expected in the short-term, we believe, with more optimism over the long-term horizon. As such, we use coal benchmark prices of $92-95/ton for FY13-14F and $105/ton for long-term prices.
Rebalancing excess supply
US thermal coal exports surged 35% yoy in 2012, with exports to China and India up 228% and 188%, respectively, albeit from a low base. This year, US exports are expected to decline by 20% due to higher transportation costs. Even so, supply from major coal exporters continues to increase (Indonesia and Australia , +1% and +11% respectively). Note that Australia increased capacity in 2012.
No significant increase in demand
Being a significant global seaborne coal importer, China ’s economic slowdown will result in slower electricity generation growth, exacerbated by higher hydropower growth vs. thermal energy growth. Higher domestic production in China aided by better infrastructure and coupled with high inventory levels will limit China ’s coal imports this year. Japan, is also expected to slow as its power plants are already running at full capacity. Furthermore, the stronger demand growth in India will not offset the overall slower demand in 2013 (power generation capacity constraints).
A strategy of survival
Most coalminers are following similar strategies simply to survive the tough market conditions. They have cut production growth to 5-15%, with the exception of PTBA as it sells most of its coal to the domestic market (i.e. to PLN, the state electricity company). Cost reduction initiatives have also been put in place – mostly by lowering stripping ratios in addition to other efficiency drives. As most coalminers are net cash, this gives them some security amidst the current low prices.
Top picks: PTBA
At the moment, we do not see near-term recovery. However, for investors seeking some exposure to the sector in the current environment of low coal prices, we believe they should look for stocks which meet the following criteria: 1) low cost structure and defensive earnings 2) abundant reserves 3) strong balance sheet. In this respect, PTBA fit the bill. In our forecasts, coal companies
under our coverage will record negative earnings growth in 2013 as a result of the lower coal prices, although this is already discounted by the market, in our view
Coal was the laggard sector in 2012 and we don’t expect much improvement in 2013 given that demand is likely to remain weak with supply rebalancing from the Atlantic (Colombia and the US). Given this, most coalminers in Indonesia have reduced production and taken cost efficiency measures in an effort to survive the current environment of low coal prices. This does not auger well for earnings. Hence, we initiate coverage with an UNDERWEIGHT recommendation on the sector.
No signs of recovery so far
The coalmining sector in Indonesia was the laggard in 2012, slumping 26% as coal prices dived 20%. The weak coal prices owed to: 1) the oversupply of thermal coal - mainly from the Atlantic (Colombia and the US), 2) weaker demand given global economic headwinds. The YTD average price has already dropped to $91/ton despite rebounding on short-term supply disruption (from Australia and Columbia ) and then declining again below $90/ton in the past 2 weeks. Moderate
coal price increases can be expected in the short-term, we believe, with more optimism over the long-term horizon. As such, we use coal benchmark prices of $92-95/ton for FY13-14F and $105/ton for long-term prices.
Rebalancing excess supply
US thermal coal exports surged 35% yoy in 2012, with exports to China and India up 228% and 188%, respectively, albeit from a low base. This year, US exports are expected to decline by 20% due to higher transportation costs. Even so, supply from major coal exporters continues to increase (Indonesia and Australia , +1% and +11% respectively). Note that Australia increased capacity in 2012.
No significant increase in demand
Being a significant global seaborne coal importer, China ’s economic slowdown will result in slower electricity generation growth, exacerbated by higher hydropower growth vs. thermal energy growth. Higher domestic production in China aided by better infrastructure and coupled with high inventory levels will limit China ’s coal imports this year. Japan, is also expected to slow as its power plants are already running at full capacity. Furthermore, the stronger demand growth in India will not offset the overall slower demand in 2013 (power generation capacity constraints).
A strategy of survival
Most coalminers are following similar strategies simply to survive the tough market conditions. They have cut production growth to 5-15%, with the exception of PTBA as it sells most of its coal to the domestic market (i.e. to PLN, the state electricity company). Cost reduction initiatives have also been put in place – mostly by lowering stripping ratios in addition to other efficiency drives. As most coalminers are net cash, this gives them some security amidst the current low prices.
Top picks: PTBA
At the moment, we do not see near-term recovery. However, for investors seeking some exposure to the sector in the current environment of low coal prices, we believe they should look for stocks which meet the following criteria: 1) low cost structure and defensive earnings 2) abundant reserves 3) strong balance sheet. In this respect, PTBA fit the bill. In our forecasts, coal companies
under our coverage will record negative earnings growth in 2013 as a result of the lower coal prices, although this is already discounted by the market, in our view
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