RBS Asia Securities Indonesia Metals & Mining - Coal export quota clarified

Metals & Mining

Coal export quota clarified

We now have clarity on the government's coal export quota plan, which proposes a domestic market obligation of 78m tonnes for 2010. This non-restrictive export quota is neutral to coal prices but still poses a risk to Indonesian coal exporters.

Buy Bukit Asam, a domestic coal play, as it stands to gain the most, in our view.

Coal export quota clarified
Following news of a plan to cap Indonesia coal exports at 150m tonnes pa in 2010, the
government has clarified that instead of specifying an explicit export quota, it will require a domestic market obligation (DMO), proposed at 78m tonnes for 2010 (still subject to approval). This compares with this year's domestic coal consumption of 68m tonnes. We believe the DMO is enough to secure domestic coal availability, given that the three power plants under the 10GW project (see Table 1) slated for completion by this year-end will need coal supply of just 6.7m tonnes pa in 2010.

Non-restrictive export quota
The proposed DMO of 78m tonnes appears reasonable to us, implying a non-restrictive coal export quota for 2010, and is equivalent to 30% of nationwide coal output,based on the Indonesia Coal Mining Association's forecast that output will rise to 260m tonnes in 2010(Chart 2). This scenario is neutral to our coal price outlook.

Imposition of an export quota
(through DMO) coupled with the plan to cut the royalty rate for low-rank coal could encourage leading companies to start producing low-calorie coal that is better suited to the domestic power sector.

Risk to Indonesian coal exporters
How a DMO will be implemented remains unclear, as implementing regulations for the new Mining Law are yet to be issued. A blanket 30% DMO for every coal company in Indonesia would pose a risk to exporters such as Indo Tambangraya, Bumi Resources and to a lesser extent Adaro Energy (25% of its coal was sold locally in 2008), as these companies might be required to produce more lower grade coal for the domestic market, or make third-party coal purchases. They mostly produce high to medium quality coal at present.

Bukit Asam will be unaffected, in our view
Bukit Asam, being a domestic coal play with 65% of its coal sold locally in 2008, should be unaffected by any DMO requirement. The stock remains one of our top picks in the sector alongside United Tractors and Adaro Energy.