Coal:Looming power shortage - Mandiri

Power blackout due to price controls and drop in hydropower generation due to drought in China have impinged energy supplies in coastal areas with stockpiles holding period around 4-5 days. The provinces in Jiangsu, Zhejiang, Fujian and Anhui are expected to face combined power shortage up to 19mn kilowatts (China Daily) or equivalent to around 60Mt coal (assuming 75% represented by coal fired powerplant). China has experienced power deficits in the past during summer in July-August as the increase usage of air-conditioners. Looming power shortage have increased the power station coal prices locally up to 840 yuan (US$130) and it is positive for China’s coal imports. While power crisis in Japan, we only see immediate hike in oil import vs moderate increase in coal import learning from the Niigata Chuetsu earthquake that led the Kashiwazaki-Kariwa nuclear outage in July 2007 (please see ex. 6). Japan’s coal imports rose by 12.6Mt (±8%) on average in 12 months after the event, remain positive in long term. China and Japan in total contributed 55% for Indonesia’s FY10 coal export.

Indonesian coal remain as the proxy. We believe amid looming power shortage in China and Japan, Indonesia would be the best option for coal supply the lower freight days than buying from other countries like Australia and South Africa, when inventory days in China and Japan power stations have been critical issue. The expected rebound in baltic freight index might support this issue as well.

The future of Indonesia-Japan coal partnership. Indonesia and Japan are discussing the development of mega-float projec. The technology was developed by Japan Inc. Japan Coal Energy Center (J-coal) is reported to complete the study by 2H12. Mitsubishi Heavy Industries Ltd and Nippon Steel Corp are likely to be the suppliers. The floats, 600 x 150 metres, is expected to be able to accommodate two Panamax ships and stockpile of 600k tons. The project is expected to worth ¥100bn and will enable speedier transfer of the fuel from barges to bigger ships in 2014. We believe once it is completed, there should be an off take agreement to secure coal supply.

BUMI, HRUM and ITMG will be the beneficiaries. Among coal producers under our coverage, BUMI and HRUM have similar exposure to China market which contributed around 26%, while ITMG about 23%. In 2010 Japanese market contributed around 15%-20% to BUMI, HRUM and ITMG, considerably higher than peers. Pricing strategy is also playing important role amid to hedge against rising fuel prices currently. In this account, we see BUMI and HRUM’s 1Q11’s ASP looks relatively attractive than peers.

HRUM, INDY and ITMG traded at single digit PER12F. Some of our coal picks have been traded fairly this year. If we roll into 2012 valuation, HRUM, INDY and ITMG are traded at the most attractive valuation in our coal coverage at single digit PER12F.