Coal outlook 2019:

Selective pick amidst slowing economy

Webinar IA Tambang ITB
3 August 2019

Sandro Sirait
[email protected]
Bio
• "Sandro Sirait, a mining engineering
graduate from ITB, has been working in the
finance/investment industry since 2015
specifically as a commodity analyst in
Trimegah Sekuritas (2nd largest local
capital market brokerage in Indonesia).
• Over the course of his career, he has
provided insights and investment advices to
stakeholders of various listed commodity
companies in Indonesia with total $30bn
market cap combined. He was awarded as
Top 3 best analyst by Asia Money in
2017.“
• One of the speakers in Djakarta Mining Club,
a mining professional networking club based
in Jakarta

Sandro Sirait
www.linkedin.com/in/sandrosirait
+6285736061497
Key points to discuss

Economic perspective behind coal and

commodity prices

Coal price forecast and supply demand

dynamics

Other key issues that matter

3
Economic driver and supply
demand dynamics
Global Commodity prices and GDP

What drives the commodity boom? What drives the supply demand?

GDP growth vs indexed commodity prices (2008-2018)

Source: Bloomberg, Trimegah Research

5
Global coal production and consumption

China is ~50% global capacity

Asia pacific is ~75% of global capacity
We see growing coal demand in South East Asia: Japan and South Korea

Source: Bloomberg 2017 data, Trimegah Research,

6
Coal: where are we in the cycle?

Let’s observe the leading indicator: the capex for heavy equipment. Just like in 2012?

Caterpillar (CAT US) lately mentioned the outlook for 2019

• Demand from China is flat
• Demand from Indonesia coal is soft

Capex from UNTR and DOID (~70% market Komatsu HE sales unit (~35% market
share) share)

Source: Bloomberg, Trimegah Research

7
Coal price divergence: dissecting coal indices

Divergence = oversupply met weak demand

During 2018 Discounts to high CV coal (Newc6,300) was widened as the low CV (4200GAR) coal prices
down to its lowest ever (29/ton) in Nov’18 near miners’ cash cost level due to oversupply from
Indonesia and weak China’s import demand in that category.

Source: Bloomberg, Trimegah Research

8
SELECTIVE PICK: low cv over high cv

High cv Risk of substitution

coal from cheap LNG price
(now is $4 down from
$9 last year),
especially for Japan
and Korea

Low-mid • China still needs low cv

cv coal coal from blending
• Indonesia’s supply
remains modest
• Indonesia build many
new power plants
 Planned Capacity
of Java-Bali Power Plants:
30GW of Coal PP or ~100mn tonnes coal

Source: Trimegah research, RUPTL PLN 10

Supply: Indonesia coal production

Govt sets coal production target of 480mn tonnes (-7% YoY)

Despite the DMO, why 2018 production was so high?
– to support current account deficit. There is no pressure in CAD to increase coal export

Source: Bloomberg, Trimegah Research

11
China factor
 Demand: China’s import declined

China introduced the import ban policy in Nov’18 (just like the following years). And was re-opened in
again in early Jan’19. The import ytd was quite strong. However, China govt guides that it will
make sure that the coal import this year will be definitely lower than last year

Cummulative China coal import increased by 6% Dec’18 China coal import fell, lowest since 2011

Source: Bloomberg, China’s administration data

13
 Supply: China’s supply back to 2015 level

China coal consumption YTD is 4% yoy Coal inventory days at high level

Source: Bloomberg, China’s administration data

14
 Supply: China’s supply back to 2015 level

China coal production increased... ..with capacity near 2015 level

Source: Bloomberg, China’s administration data

15
 China’s coal policy: what happened in 2016

Coal price rallied in 2016 as China cut down its capacity due to huge debt at coal miners
The State Council issued the policy stating that China will cut up to 1000 million tons (MMt) of coal
production capacity in the next 3–5 years starting from 2016 and ordered all coal producers to reduce
the number of annual working days from 330 to 276 (State Council, 2016).
Four sectors - coal, steel, cement and non-ferrous - owed a combined 10.2 trillion yuan
($1.5 trillion) in debt as of 2016, according to a government document.

China tried to control the price in 2016 To avoid huge default debt level in coal miners

Source: Bloomberg, China’s administration data

16
 China’s coal policy: what to expect

China’s key policy

1. Making the domestic coal price favourable
2. To lower coal import this year
3. Plans to reduce electricity cost due to slowing economy >> to pressure domestic coal prices

Source: Bloomberg, China’s administration data

17
Macroeconomics
 10
15
20
25

0
5

-20
-15
-10
-5
(%)
1/1/2013
3/1/2013
5/1/2013
7/1/2013
9/1/2013
11/1/2013
1/1/2014
3/1/2014

Source: Bloomberg, Trimegah Research

5/1/2014
7/1/2014
9/1/2014
11/1/2014

Indonesia
1/1/2015
3/1/2015
5/1/2015

Cina
7/1/2015
9/1/2015
11/1/2015
Export growth of some important economy

1/1/2016

Korea
3/1/2016
5/1/2016
7/1/2016

Japan
9/1/2016
11/1/2016
1/1/2017
3/1/2017
Euro

5/1/2017
7/1/2017
Global economic slowdown is already here

9/1/2017
US

11/1/2017
1/1/2018
3/1/2018
5/1/2018
7/1/2018
9/1/2018
11/1/2018
1/1/2019
3/1/2019
19
What to expect going into 2019 (macro)

2019 2020
1. Fed should start to question their monetary 1. Fed rate increase is peaking/market start expect
tightening, USD to reach its peak and talk on weak Dollar possible easing
Global to intensify
2. ECB and Japan start to commence their own tightening 2. Tightening in other major economy to continue

3. Trade war should indicate some change on the world 3. Talk about slowdown in global market should
economy escalated
4. Emerging market imbalance should improve, but at 4. Emerging market imbalance should be oke, CA deficit
lower economic growth problem solved, possible market re-rating
5. China economic moderation to continue 5. China economy to find new stability

1. Trend on weaker IDR to continue, albeit in smaller 1. IDR to stabilize/strengthening, talk on rate cut should
Domestic pace emerge
2. BI tightening to continue to contain the Current 2. CA deficit to be below 2.0% of GDP, Liquidity to get
Account Deficit better, LDR could be lower
3. Inflation to edged higher, supported by supply side 3. Economic recovery will be firmer
and demand side
4. GDP growth will tend to flat or slower 4. Investment growth likely to edged higher
5. Market rally prior election is possible 5. Inflation will be normalized after fuel price hike

Source: Bloomberg, Trimegah Research

20
 Major Economy Monetary Expectation

• Although Fed dotplot is expecting 2 more rate hike this year, OIS OIS market expectation on 2019 Fed Fund Rate
market expect that no more interest rate hike to occur this year
with possible interest rate cut in 2020.

• Interest rate around the globe already move up in 2018, at the

early 2019, as rate hike expectation abated, 10yr US t-bills yield
start dropping to 2.7% level.

• However, we need to keen on the possible continued the Fed

balance sheet unwinding. The pace of balance sheet unwinding
and flows to Indonesia Financial Market has 87% correlation
since the first FFR hike in 2015.

Movement of important interest rate Balance Sheet Unwinding and flows to Indonesia
(%) (pts) USDmn (USDBn)
6 105 20000 2500
Fed Start Balance
Correlation: -0.34 Sheet Unwinding
100
5 15000 2000

95
4 10000 1500

90
5000 Correlation: 0.87 1000
3
85
0 500
2
80
-5000
Firtst Fed 0
1 Rate Hike 231mn
75
-10000 -500
1/1/2011
5/1/2011
9/1/2011
1/1/2012
5/1/2012
9/1/2012
1/1/2013
5/1/2013
9/1/2013
1/1/2014
5/1/2014
9/1/2014
1/1/2015
5/1/2015
9/1/2015
1/1/2016
5/1/2016
9/1/2016
1/1/2017
5/1/2017
9/1/2017
1/1/2018
5/1/2018
9/1/2018
0 70
Aug-04
Feb-05
Aug-05

Aug-06

Aug-07

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Aug-17
Feb-18
Aug-18
Feb-04

Feb-06

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Feb-17

FFR (LHS) 10yr US t-bills (LHS) Dollar Index (RHS) Foreign fund flows to Indonesia stock and bonds market (LHS)
y-y change on 3 major economy central bank balance sheet (RHS)
Source: Bloomberg, Trimegah Research
21
 Are we ready with China rebalancing?

Current Account and Consumption Relation

• China currently is in rebalancing phase and slowed down the CA balance to GDP (%)
25
economy. Market currently expecting 6.00-6.3% of China GDP
growth in 2019. 20

SIngapore

• In the other side, China Current Account Balance already 15

dropped from its peak and likely to record the first time CA deficit 10
Thailand

in 25 years in 2019, on dropping trade surplus due to trade wars Germany

and continued widen services deficit on rising local consumption. 5 Korea Japan

Saudi Arabia Italy

China Malaysia
0
Indonesia
• The continued Current Account Deficit in China is likely to bring France
Australia
India
S. Africa USA
Philippine

more volatility on CNY going ahead. -5

Canada
New Zealand
Turkey UK
Consumption
y = -0.3964x + 23.395
-10 R² = 0.4051 to GDP
30 35 40 45 50 55 60 65 70 75 80

China Current Account Balance China saving and investment gap

(USDmn) (%)
800,000
52

600,000 56,776
47 43

400,000 42
42
37
200,000

32
0

27

-200,000
22

-400,000
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
1Q11
3Q11
1Q12
3Q12
1Q13
3Q13
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
3Q17
1Q18
3Q18

Investment to GDP Savings to GDP

Good Balance Services Primary Income Secondary Income CA balance

Source: Bloomberg, Trimegah Research

22
Price forecast
Trimegah Coal price forecast

Price forecast for each coal price index category

Source: Trimegah Research

24
Trimegah Coal price forecast

Low CV coal price should normalize as we expect coal production will gradually decline
following the low coal price that is near miners’ cash cost level

2018A 19YTD 2019F 2020F 2021F 2022F 2023F 2024F 2025F

Coal Newc6300GAR assumption

105.9 88.5 80.0 75.0 70.0 65.0 65.0 65.0 65.0
($/ton)

Coal Newc5500GAR assumption

72.4 59.6 57.5 54.0 50.0 50.0 50.0 50.0 50.0
($/ton)

% to benchmark 68.4% 67.4% 71.9% 72.0% 71.4% 76.9% 76.9% 76.9% 76.9%

Coal 4200GAR assumption ($/ton) 44.1 36.7 35.0 32.5 30.0 30.0 30.0 30.0 30.0

% to benchmark 41.6% 41.5% 43.8% 43.3% 42.9% 46.2% 46.2% 46.2% 46.2%

Source: Trimegah Research

25
Key issues
Some key issues

Global macro
• Global are going through economic slowing down
• US-China trade war gives pressure to economic growth
• Economic stimulus

China coal policy

• Coal import ban
• Safety regulation
• Economic data – economic stimulus

Indonesia’s policy
• DMO policy (transfer quota)
• Production cap
• CCOW extension (higher royalty and lower tax)

Source: Trimegah Research

27
Conclusion
Conclusion

 We see global coal price to normalize on the back of global and especially China slowing economic
growth. China’s economic imbalances, going to current account deficit, would incentivize China to
reduce coal import, giving risk to global seaborne coal price, especially low CV Coal.
 We expect low cv coal price to be more stable compared to high cv coal as cheap LNG price may
incentivize high CV coal users to switch to gas. Low cv coal supply demand seems unchanged

 Our coal price forecast in 2019

 6,000NAR at USD80/ton LT price at USD65/ton
 5,500NAR at USD65/ton LT price at USD50/ton
 4,200GAR at USD37.5/ton LT price at USD30/ton

 Indonesia coal production would be 490mn tonnes this year (-7% YoY) as guided by the govt.
Heavy equipments and mining contractors also guided the similar declining trend

 Some issues to watch:

 US China trade war and possible economic stimulus
 China’s policy on coal (price control, import, and safety control) and economic data
 Indonesia regulation (DMO, CCOW extension, production cap)

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Bonus page – What stock to buy?
Disclaimer

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Thank You