BASML *Coal - Indonesia: 2009 coal outlook*

*Coal - Indonesia: 2009 coal outlook*
We maintain our optimistic stance on Indonesia coal in 1H but turn increasingly cautious in 2H as we see more downside risk to Indonesia coal demand and pricing. The main culprits are: (1) the new requirement by the Indonesian government to use letter of credit (L/C) for all coal exports effective 5 March, (2) most term contracts will likely be completed by June and (3) more competition. Our cautious view assumes current economic conditions neither worsen nor improve.

We're concerned that the requirement to use L/C might discourage customers from buying Indonesia coal due to higher costs and some pronounced difficulties to open L/C. With coal price and risk appetite falling and more coal supply available, we see downside risk to our forecast for Indonesia coal companies' coal exports.

We're already seeing the invasion of semi soft coking coal (PCI) into the thermal market. We expect rising competition from Australia, especially with the freight difference narrowing, port congestion seemingly subsiding and Australian coals' relatively high calorific value. We could see competition from gas especially for Eco-coal should freight costs jump and gas prices fall. Besides Indonesia, Russia and the US are the other Eco-coal producers.

Speaking with a wide range of our industry contacts, we have yet to see major signs of demand slowdown. We suspect that up to June, Indonesian coal producers will still be carrying out their term contracts, which continue to be honored for now. We've also noticed robust demand from India. But this may not be sustainable in 2H, with some of our contacts suggesting the buildup of coal stockpiles.

We believe thermal's trade was buoyed in recent weeks by early-year short-covering and some buying by Indian/Chinese utilities. In line with the views of other Asian utilities, we see this as a short-term phenomenon. We see downside risk to our 2009 coal price forecast of US$80/t to as low as US$60/t.

While the export market has seen more downside, we see opportunities for the domestic market. We understand that state-owned electricity company PLN will add three more coal-fired power plants, which could consume additional coal of around 10mn t. We remain upbeat on coal companies that already have a dominant presence in the domestic market, with our top picks in order of preference being PTBA and ADRO. About 70% of PTBA's coal output is sold domestically (ADRO; 30%).

We will be revisiting earnings and POs of all coal companies we cover to take into account these risks., If volume growth for the companies is flat, or only mild growth, there could be downside to our forecasts.