COALspot.com - “The current low coal prices were mainly due to a global oversupply condition, spurred by numerous mining exploitations in the past 3-4 years due to attractive coal prices”, said Edi Prasodjo, Director of Coal Business Development at the Ministry of Energy and Mineral Resources (MEMR), Monday during “Indonesia Coal Price Trend and Market Outlook” conference, as quoted by Bahana Securites note to its clients.

Bahana Securities note further said that, Edi Prasodjo further commented that current low prices are challenging for Indonesian small-to-medium coal companies with many of them having stopped production. MEMR forecasts a lower production output of coal in 2012.  Ministry of Energy and Mineral Resources  is expecting the will fall to 332 million tons, down 6 percent y-y.

Energy and Mineral Resources ministry, however, forecasted a higher production output in 2013 and 2014. The ministry is expected the production in 2013 will be around 337 million tons and 342 million tons in 2014, still at same levels or lower than 2011 production volume. 

According to Bahana’s note, Indonesia has already produced around 215 million tons of coal for first seven months of this year expects further deceleration in the remaining period of 2012.

The government has no plan to cap coal production to mitigate the current oversupply condition, as indicated by Director of Coal Business Development at the Ministry of Energy and Mineral Resources. Bahana said in its note, according to Edi Prasodjo, the production output restriction is unlikely to occur in the short-term as coal’s importance in the Indonesian state budget. Coal exports contributes  IDR 20.8 trillion  as non-tax state revenue in 2011 up from IDR5.8t in 2007.

In addition to that, the government is still converting all Non-Clean and Clear (Non-CNC) IUPs to be CNC IUPs and it is expected to be completed by the end of this year. 

According to Bahana, “we learned an interesting development within the global coal industry”.  Bahana said, according to a coal company, some of US manufacturers are starting to pulling back manufacturing plants from China to the US on the back of lower production costs helped by the availability of cheap shale gas.  This coupled with the eventual repair of China’s railway problem and other technological advancement such as HVDC cable will pose longer term uncertainties on the fundamentals of coal.

Bahana adopts a different view on world coal outlook compared to a Mackenzie keynote speaker, in which he stated that longer term coal fundamentals would remain intact with main demand coming from China and India. Mackenzie believes that Chinese coal imports are mainly driven by coal price arbitrage between domestic and international coal prices. 

Testimony to this was higher 8M12 coal imports (+44% y-y, exhibit 10), although we note volumes had been on the decline in the past two months with August volumes just up a paltry 4% y-y.  In 2013, Mackenzie also expects China’s coal imports to grow 11% y-y to 250m tons, before further increasing to 500m tons in 2020 on higher demand.  In India, coal imports are expected to almost double from the current 100m tons to nearly 200m tons in 2020 caused by infrastructure bottleneck (India's power plants are mainly concentrated in Western, Southern and Northern India, while production is based in Eastern India).  However, we note that Mackenzie does not see much coal price improvement through 2013 from current levels.

Bahana  believes upside potential on coal price remains limited due to weak coal demand.  Bahana  maintains its 2012 average coal benchmark price at USD97/ton, but Bahana’s forecasts prices for 2013 is much lesser than 2012 price. Bahana maintains it 2013 coal prices at USD85 / ton in 2013, around US$ 12.00 below its 2012 forecasts. Bahana retains its underweight stance on coal sector and expect its underperformance to persist going forward.  Currently, with 23% average downside to our target prices (TPs), all of Bahana’s covered coal companies have reduce ratings.

In the meantime, the Jakarta globe, an English new paper in Indonesia reported that, the Indonesian government has scrapped plans to raise coal sales in the domestic market until at least 2014, as state utility company Perusahaan Listrik Negara (PLN), its main customer, has more than enough stock, a senior official at the Energy and Mineral Resources Ministry said.

“There used to be a plan to increase the DMO so that PLN could get more [coal], but now PLN has more than enough,” Rudi Rubiandini, deputy minister for energy and mineral resources, said on Friday, as quoted by The Jakarta Globe.

According to paper, Rudi’s statement echoed those of Helmi Najamudin, the head of the coal division at PLN, who said supply had surpassed consumption for the next two years. Helmi said coal consumption would exceed supply in 2015, where it will reach 88.8 million tons.

As Indonesian domestic market is not going to absorb more coal at least for another two years, the oversupply of coal to export market is unavoidable. Hence the coal price recovery will be in slow move unless there is any unexpected situation occurred in oil industry, oil transportation routes or demand side.

"The best way to escape from a problem is to solve it." – unknown source