Remains on Fire!
Best Price Performing Commodity
• The black rock commodity is unstoppable, rising by +246.19% YoY/+114.60% YTD to its highest ever at USD172.75/mt. We see that the pattern is quite similar to what happened a decade ago, after the financial crisis, shown in the fall on the price in 2008 and again in 2020, coal rose to its previous peak in 2011. At the time, China was on their revolutionary path to become the economic powerhouse, their coal demand rose by 325 million tons in 2011.
• According to the British Petrol, the only region with rising coal usage is Asia while other countries have already shown coal energy decrease over the past decade. Nevertheless, we believe that coal will not be abandoned shortly by the Asian countries as it remains a reliable and cost affordable source of energy. Based on our technical review, coal price might rise to its resistance at USD188/mt. Since we see that demand is still strong while most countries are still in the pandemic state and considering the upcoming winter demand, we decide to increase our average price estimate to USD110/mt in FY21E.
Domestic Coal Crisis
• The Ministry of Energy and Mineral Resources (MEMR) stated that as of 1H21 DMO realization reached 46.16% out of the 137.5 million ton target in FY21E. The low achievement has caused a domestic energy crisis, admitted by PLN, hence the government has established a new export restriction toward 34 DMO offender companies. Several listed companies will be affected as follows: 1) PT Arutmin Indonesia, a subsidiary of BUMI; 2) PT Hanson Energy, a subsidiary of ARII; 3) PT Borneo Indobara, a subsidiary of GEMS; and 4) PT Bara Tabang, a subsidiary of BYAN which recently has fulfilled its DMO obligation and got the export ban lifted. We assume that there is a reluctance for DMO compliance, other than the huge price disparity (~USD100/ton or 144.64%), the bad weather in the 1Q21 had caused a low production volume, leading the companies to focus on export.
• However, PLN coal absorption reaches 82.18% of the DMO or 113 million ton. Ultimately, when it came to a decision, the government would choose not to adjust the DMO price, as it will also affect the public electricity rate.
Asian Coal Plant Closures with Indonesia on the lead
• Several major financial firms such as Asian Development Bank (ADB), Citi, HSBC, Prudential, and Blackrock are planning to quicken coal plants retirement in Asia. Of course, this is aligned with the commitment for zero carbon emission in the light of the global warming, as coal contributes 46% of total Co2 emissions and 72% of total greenhouse gas emissions worldwide.
• Indonesia would roughly need USD16 billion to USD29 billion (IDR232 trillion – IDR420.5 trillion, assuming IDR14,500/USD) to shut down 50% of the plant capacity. Furthermore, based on the Paris agreement, Indonesia aims to self-reduce 29% of emission by 2030 or reduce 41% with help from other countries. While the government already plans to retire 50 GW by 2056. Assuming that with 25.27 GW capacity, the current coal carbon emission stood at 24,259 tons (based on US EIA data, 1 GW = 960 tons Co2 emission). As of 2056, Indonesia can reduce 47,040 tons of Co2 and decrease coal usage by 245 million tons.
• We see that this would pose a risk for the coal sector overall as there are already international intervention to cut the business short, especially with a direct buying scheme that will not be profitable for coal companies in the long run.
Overweight Outlook with Top Picks: ADRO IJ and PTBA IJ
We decide to revise our outlook from NEUTRAL to OVERWEIGHT as we increase our coal average estimate for FY21E. Hence, we also revise our target price for ADRO IJ from IDR1,450 to IDR1,830 and ITMG IJ from IDR14,400 to IDR20,500. Our decision is supported by the massive increase on ASP and improving productions in the 2Q21 and for the rest of the year as the 1Q21 operations were disrupted by heavy rain. Our BUY recommendations goes to ADRO IJ (TP: IDR1,830) and PTBA IJ (TP:IDR3,000), as we believe these two companies won’t be affected as much as ITMG IJ when coal price drops in the future, as these two already have other initiatives beside coal exports.
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