Coal Mining - FY24 Outlook: Soft demand and steady supply flow to drive further price normalization

Stock Code	Last Price	Change	Change %
MFIN	4,600	920	25.00%
DCII	167,325	575	0.34%
FORU	1,690	335	24.72%
GGRM	10,175	325	3.30%
LIFE	6,600	300	4.76%
UNVR	1,750	255	17.06%
PANI	11,700	225	1.96%
CUAN	7,025	200	2.93%

Coal Mining

FY24 Outlook: Soft demand and steady supply flow to drive further price normalization

We expect the thermal coal market to remain in a supply-driven surplus in FY24, and expect the Newcastle coal price to moderate to US$120/t.
Based on our forecast, we project 13-29% net profit declines in FY24 for the coal miners and expect earnings to bottom out only in FY25.
We retain our Neutral rating on the sector on undemanding valuations and attractive dividend yields (9.1-28.4%) to cushion declining earnings.

Stronger production and softer demand led to a market surplus in FY23

We expect global coal trade volume growth to slow to 3% yoy to 1.2bn tonnes in FY23 (vs. 7% yoy in FY22). On the imports front, lower volumes were driven by slowing imports from Europe (-51% yoy; inline) on the back of higher LNG availability, which offset imports growth from China (+61% yoy; inline) and JKT/ ASEAN/ India at -10%/ -15%/ +10% yoy (below expectations, except for India). On the supply side, as expected, Australia’s exports led the supply growth (~+10% yoy; inline), followed by Indonesia (-1% yoy).

ST outlook: winter demand may be capped by ample inventory

Despite rising imports (+6% mom in Oct-Nov23 vs. Sep23), largely driven by a rebound in China and India’s imports from domestic restocking, we think steady supply flow and China’s sufficient inventory may limit import demand and price upside despite the ongoing winter demand.

Expect the market surplus to moderate prices further in FY24

We expect the stronger domestic production growth in key markets (India and China) to continue and thus, expect the soft demand outlook to persist in FY24. We believe Australia and Indonesia will continue to drive supply amid available capacity and normalizing weather conditions. We expect the market balance in FY24 to remain in surplus (~5-10Mt) and project the Newcastle coal price to average US$120/t in FY24 with the ICI3/ ICI4 price at US$72/ US$55/t.

Coal miner earnings to contract in FY24-FY25

On the back of the projected 31%/ 15%/ 15% price moderation for Newcastle, ICI3 and ICI4 prices, we forecast 13-28% net profit declines in FY24 for coal miners under our coverage (i.e. ADRO, ITMG and PTBA), with HRUM expected to see the lowest drop in earnings in FY24, cushioned by its nickel business contribution. We expect earnings to bottom out only in FY25, as we expect coal price normalization to continue.

Maintain Neutral as valuations and dividends may cushion falling coal prices

We retain our Neutral rating on the Indonesian coal sector on the back of undemanding valuations (at 1.7-6.7x FY24 EV/ EBITDA, attractive dividend yields (at 9.1-28.4%) and low ownership by domestic funds, despite the still declining earnings in FY24-25F. We think miners with higher exposure to the low-medium CV products shall fare better given the smaller projected decline in ASP. Our pecking order of preference is: ADRO> HRUM> PTBA> ITMG.

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