Citigroup - Indonesian Coal; Takeaways from the Coaltrans Asia Conference

Long-term positive — Industry players’ general view on the coal market is positive for medium/long-term. Key themes are: 1) Sharp contangos and under-investment point to market price rebounds. 2) China to reduce exports (e.g. net importer of 10-20mt in 2009), while India grows imports. 3) Australia should fuel seaborne market supply growth, while Indonesia and Russia should see stable growth.

Demand outlook — In general, industry players project import to grow at 2-3% CAGR over with China and India to drive the growth, as North Asian importers are expected to see flat growth. On China, Wood Mackenzie predicts China to remain a net importer in 2009; going forward export is expected to gradually decline, flattening at c.30mt level in 2015. On India, production vs. consumption shortfall projected to grow to 160mt by 2011-12, from 62mt in 2007-08.

Themes on Indonesian coal industry — 1) Domestic consumption is projected to increase to 50% by 2020 (from 75% at present); by volume, however, export should remain stable. 2) As a result, government’s policy on domestic supply security (i.e. DMO) should become even more critical. 3) Indonesian low-CV (subbituminous) coal has gained competitiveness in the market (export market to Korea, Taiwan, India, SEA, Europe, and in trial-stage to Japan).

More on Domestic Market Obligation — The government affirms the plan to implement DMO. It is encouraging that the government sees pricing policy for domestic market as an integral part of DMO implementation and expects prices to reflect the quality of the coal. Other provisions discussed are: possibility for producers to buy/sell volume to meet the DMO, penalties for producers failing to meet the requirement.

Implication to sector view — The liquidity-driven rally of late has further re-rated the valuation for Indonesian coal stocks to 10x ’09 PE, although the discount to Chinese players remained at 25-30%. Albeit not a major surprise, the positive long-term market view from the conference is encouraging and if materializes sooner, it may translate into an upside in our price expectation (Citi’s current forecast of US$70/t in 2010-2011E and long-term price of US$60/t).