BASML Whither, Indonesia coal?

Coal, share prices may be directionless for another month
Since early February, Indo coal stock prices have been flat to down (5%), and
Newcastle spot price is down 4%. Despite downside risks, given very light
physical trading volumes, coal prices may be directionless until Japanese Fiscal
Year settlement (widely expected in early/mid April).

Falling Chinese coal price taking a toll on Indonesia coal
Platts quoted (5 Mar) a coal trader, saying he received at least three offers to sell
Indo coal with heating value of 5800-5900kcal GAR at $63-65/t from producers
who only a month back said they had no stock. We confirmed this with our
contacts, who added that some shipments were recently cancelled by buyers.
This, when domestic price in China has fallen 19%. The significance – China
domestic & Newcastle spot prices have strong correlation (R²=0.8) since 2006.

PLN’s low inventory not a big help, in our view
Our channel checks suggest PLN’s inventory, ironically, is quite low and it is
paying a better rate than the above (around US$59-60/t for 5000kcal GAR coal).
But not everyone is capable of selling to PLN – we believe that’s because of
PLN’s longer payment terms (about a month), against others (3 -14 days only).

Russian coal entering Asia; SA coal available after May
With European demand weak, Russian coal is apparently entering Asia. Although
it has high calorific value (6800-7200kcal) and low sulfur (0.2%), it is not popular
because of frozen ice, we believe. It is primarily going into China, as per our
understanding, but Platts reported a possibility that Japan may have bought also.
We see further downside with more available coal coming from South Africa as India heads into a monsoon starting May.

The bullish story: Coking coal and MMTC buying
Not all are bearish, though. Many are watching coking coal prices, expecting to
see more capacity allocated to coking coal rather than thermal coal, given
favorable pricing. Price for 2Q was settled at US$200/t, up 55% (vs. spot US$220-
240/t) and prices are seen to rise the rest of the year. Moreover, we understand
from our channel checks that MMTC of India will issue a coal tender for 13mt
(awarded June) – a high price settlement here would be a boost for the sector.

SAR our only Buy in the Indonesia coal space
We reckon many in the market are playing the wait and see game now – i.e.,
ahead of the JPY settlement – than in 2008 (coal frenzy) and 2009 (lot of
available coal supply). Given the current coal market dynamics we recommend a
Buy only on SAR. Arguably the cheapest (US$70/t implied coal price, at 45%
discount to historical peak), it offers the highest upside potential.