Indonesia's Coal Price Soaring, Reason for Euphoria? Or Not?

Indonesia's Coal Price Soaring, Reason for Euphoria? Or Not?

Indonesia's November 2016 coal price broke a record. The nation's benchmark
thermal coal price (locally known as the Harga Batubara Acuan, HBA) - a
monthly price set by Indonesia's Energy and Mineral Resources Ministry and
which is based on domestic and international coal indices - jumped 22.9
percent month-on-month (m/m) to USD $84.89 per metric ton this month, the
highest monthly HBA price rise ever recorded. Compared to the start of the
year, Indonesia's coal price has now risen 59.6 percent, the sixth straight
monthly gain. But is this reason for euphoria?

Although the sharply jumping coal price has brought a wave of fresh air into
current perceptions about Indonesia's coal mining industry (reflected by
rising shares of coal miners listed on the Indonesia Stock Exchange), we
should not become too enthusiastic as the surging price is not so much
caused by rising global demand but by declining global supply.

The main reason why coal prices soared since mid-2016 is China's decision to
slash coal production. Chinese authorities cut working days on coal mines
from 330 days to 276 days in April 2016 in an effort order to remove excess
capacity from the industry. This move should boost earnings for domestic
coal miners and therefore this sector will not continue to be a burden on
China's financial system (for example recently rising non-performing loans
in China's banking sector). China also plans to close 1,000 coal mines this
year and will likely, eventually (perhaps in the next five years), cut 500
million to 700 million tons of capacity from its overall annual production
of about 3.6 billion tons.

In 2015 China produced 3.68 billion tons of coal, down 3.5 percent from
China's coal output one year earlier. This year, coal production in the
world's second-largest economy is expected to decline by 4.2 percent (y/y).

The key question therefore is: "how long will China remain committed to this
policy?" In case China would decide to add coal production capacity in order
to take advantage of current coal prices the recent aggressive upswing could
possibly swing the other way.

Meanwhile, Mike Evans, analyst at stockbroker Curran and Co, advises
investors to be aware of the difference in coking coal and thermal coal
producers: while coking coal is needed for steel, coal is not needed for
electricity. Many regard thermal coal as dead or - at least - dying and
therefore investors remain cautious (as well as the emergence of renewable
energy sources).

Supriatna Suhala, Executive Director of the Indonesian Coal Mining
Association (or APBI), informed the production cuts in key coal-producing
countries have now led to a shortage of 100 million tons of coal, hence we
saw the soaring HBA price this November. Sumala added a coal price around
USD $80 per metric ton is a price that is economically viable for the coal
industry.

Meanwhile, the smaller Indonesian coal miners that ceased production over
the past two years due to low coal prices are not expected to suddenly
restart the production process. Sumala believes it will require six more
months before they can produce again. For coal prices this is a good thing.
Limited supply should support coal prices well into the first half of 2017
provided China will not suddenly adjust its coal mining policies.

Last year Indonesia produced 451 million tons of coal. This year output is
expected to decline. Up to August the nation's coal miners only produced a
total of 294 million tons of coal, achieving about 70 percent of the
government's coal production target set for this year (419 million tons).

Although Indonesia's domestic consumption of coal remains rather
insignificant (compared to exports), domestic consumption is expected to
rise starting from 2018 on the back of new coal-fired power plants under the
central government's 35,000 MW program. APBI expects Indonesia's domestic
coal demand to rise to 177.5 million tons (per year) by 2020.

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Link to Original Article:
http://www.indonesia-investments.com/news/news-columns/indonesia-s-coal-pric
e-soaring-reason-for-euphoria-or-not/item7343

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John Diecker
APT Consulting Group Co., Ltd.

www.aptthailand.com