Coal Sector

Improved Price Outlook Amid Tighter 1H24 Market S-D and Rising Costs; Upgrade Sector to OW

• Stable coal prices in 1H24 have been supported by improved S-D, amid firm China, India demand and surprisingly weak Indonesia’s production.
• Rising production cost for Indonesian producers shall add support for LT prices amid firm demand; we raise our FY24-25 coal price and EPS f’casts
• We upgraded the sector’s rating to OW on the improved price outlook. Our preferred picks are ADRO and ITMG.

Resilient prices during the low season aided by better-than-expected S-D

Newcastle, ICI3 and ICI4 coal prices have averaged at US$130/ $76/ $56/t in the low-season YTD, 2-8% above our FY24 average price forecasts. We believe that resilient prices have been supported by a better S-D condition, amid firm demand and surprisingly tighter supply from Indonesia. With inventory levels in China and India suggesting possible bottoming out of seasonal demand in Jun24, we see potential for a stronger price rebound in 4Q24 Winter season, and hence, upside in our FY24-25F price forecasts.

Strong China and India imports, tighter supplies from Indonesia and Aust.

On the demand front, China’s and India’s import grew at a strong rate of 12% and 11% yoy, respectively, in 5M24 (vs. FY23’s 58% and 4%, and our forecast of 10% and 5% respectively). Meanwhile, supply from the main exporters, namely Indonesia and Australia, grew at slower-than-expected rate of 4% yoy and -7% yoy. Overall, the S-D in 1H24 have thus far indicated a market deficit, contrary to our earlier expectation of a slight surplus.

Indonesia: 2Q24 production may have been affected by higher rainfall

Official data from MEMR showed that Indonesia’s coal production grew by only 3% yoy, with a noticeable production slowdown in May-Jun24 (-9% yoy). The soft 1H24 national production growth contrasts with the strong production growth reported by the listed coal contractors (Pama: 5M24 +16% yoy), which implies that the softer production growth in 2Q24 may likely be driven by shortfall from the smaller miners, possibly due to the unexpected increased rainfalls in certain mining regions in Jun24.

Raising our FY24-25F and LT price est. as rising cost add further support

On top of the tighter S-D condition, we believe the resilient coal price shall also be attributed to the escalation in the major miners’ costs, as we noted that miners under our coverage have experienced a US$11-20/t (14-15%) rise in their cash cost over the past 5 years. On the back of these factors, we lifted our FY24-25 coal price assumptions by 8-20% and LT price to US$100/t (vs. $90/t prev.) and accordingly raise our FY24-25F earnings forecast and TPs for the coal miners by 8.7-32.3%.

Upgrade sector rating to OW, top picks are ADRO, ITMG.

Amid the more favorable coal price outlook, we upgraded the sector rating to Overweight (from our tactical-driven Neutral rating prev.). Our top picks in the sector are ADRO (Buy, TP Rp3,770) and ITMG (Buy, TP Rp31,300), which we believe will benefit more from the rising export prices. Key risks are strong recovery in Indonesia’s supply and weakening China demand.

… Read More 20240722 Coal