CIMB - Coaltrans Conference: Highlights from Day 1

More positives than the negatives, with the latter mainly coming from the not-so-clear PLN and government stance.

The positives:
1. Demand supply dynamics and thus prices would just get better. All speakers from many different parts of the world and backgrounds giving out that price is just getting better, given the sharp contango on today's prices. The lowest forward price for 2011 now is $90/tonne, which is in line with our expectation.
India is often cited this time around, as a major demand driver, as recent successful election suggests continuation of progress in the country's development, including the 50GW power plant project. Meanwhile, China is expected to continue to be net importer in near term.
Export supply from all parts of the world will be capped by domestic demand, while Australian supply capped by infrastructure.
Added to this, coal is considered underinvested compared to other commodities - less than 5% of global investment in commodities. This limits the supply optimization.

2. Consolidation is the emerging theme. Consolidation in the global coal sector by strategic players is expected, especially in major suppliers such as indonesia, South Africa and Rusia, with Australia viewed more consolidated already. Indonesia is particularly attractive, given the better economical value and lower cost structure (closer location to most users and lowest marginal production cost in the world). The new mining law, while implementing details yet to be issued, is perceived as better rather than nothing at all. If consolidation occurs, this would likely tighten supply, leading to higher coal prices and higher asset prices. We could see this consolidation more, given the current low asset prices. Our channel checks with few industry players suggest a market price (EV/reserve) of $6-7/tonne currently, and the trend is picking up given better liquidity and more interest is showing up.

3. Changing in key coal price drivers. A survey was done by one of the speakers comparing the perception of the market and industry participants globally of today Versus a year ago on coal price drivers. The rankings of the top drivers remain the same. The first is demand in the Pacific area market followed by correlation with oil price, freight rates and influence of market players trading coal derivatives. However, the Pacific market demand is now perceived less important than a year ago, while the other 3 drivers are more, especially the oil price correlation and derivative market.

4. Royalty and taxes for coal companies unchanged. Despite the statement in the new mining law saying that the state revenue would be maximized, Indonesian Director General of minerals and mining (Dirjen Minerba) confirmed that no change in royalty and tax structure for the companies. The statement was intended for the KPs that have reported extremely low ASP. But, the new ministerial decree on Indonesian coal reference price (based on average of BJI, Globalcoal, ICI, Platts) slated by Aug09 should resolve this. This would likely be the price reference for DMO (domestic market obligation) as well. The government plans to appoint an agency to collect and manage the DMO coals. The DMO amount would be officially set in a ministerial decree in to be issued in Jul/Aug, and would be proportionally distributed among coal producers.

5. The transition from KP to IUP already starts. Although implementing decrees are not yet out, but our channel checks suggest that it's already ongoing. Foreigners are coming in to buy existing KPs and convert them to IUP.

The not-so-positives:
1) PLN position is unclear. There is supposedly a meeting during the conference between the related ministries, Dirjen Minerba and PLN about the domestic coal price. PLN were said to be proposing price which is lower than reference, and is apparently still having high production cost of Rp1,200/kwh versus electricity ASP of Rp660/kwh. However, recommendation from Dirjen Minerba for PLN is to use the lowest export price as reference. The discrepancy between PLN - which always goes for low coal price - and Dirjen Minerba - which tries to maximize government revenue - still exists.

2. Talks about PLN renegotiating the high contract price? There seems to be pressure for PLN's high contract price (Suralaya especially) to be renegotiated downward. PLN seems unsure about this though. The change in minister and government in just a couple of months could hinder this.

3. Divestment terms in IUP. There're a lot of talks regarding this (IUP foreign holders have to be divested after 5 year of production). The talks are 20%. Dirjen Minerba said foreign could still hold majority in IUP even after divestment .