Behind the closed doors of 2011 Bali coaltrans conference - BoAML

2011, the biggest Bali coaltrans conference
Last week (29 May to 1 June), we attended the 17th Bali Coaltrans Conference.
More than 2000 participants and 50 sponsors took part this year, compared to
around 1700 last year, which is a historic high. Five key things we gathered from
our contacts and conference presentation: 1) sentiment generally bearish, but
price bullish; 2) more Chinese players looking for lower rank coal; 3) India less
aggressive; 4) optimism on higher 4Q price; and 5) royalty could be hiked.

US$115/t floor for coal price – consistent with our last note
Our channel checks indicated that many buyers believe US$115/t coal is good
value for money (vs. current spot of US$118/t). We are aware that a big Indo coal
company sold 2mn t 5300kcal NAR coal with relatively high sulfur (2%) to China
at US$104/t (no discount to the current spot NEWC on an index basis). One week
before the conference, 4400kcal NAR coal could be sold to China at US$82/t, but
post conference, it seems it could be priced a couple of dollars higher.

Chinese buyers even looking for 3500-4000kcal coal
We believe China has come a long way in learning the commercial benefits of
coal blending. We understand they can take up to 3500kcal NAR coal, compared
to 5000-5500kcal NAR coal in 2008. We believe the pricing expectation is pretty
good as well: for 4200kcal NAR coal, we understand they are willing to pay
NEWC minus 25-30%. For 3500kcal coal, the price is NEWC minus 40-50%.

Not much low CV coal available for sales now
This kind of pricing could be achieved as 1) there is not much coal available for
spot sales out of Indonesia; 2) there is even less low rank coal available for sale
as it’s most likely used for blending with higher CV coal.

India not that aggressive
Our contacts indicated that India is not an aggressive buyer at this point. Perhaps,
it is still monsoon in India and it seems they have been downplaying on demand.
Also, India has been watching closely on API pricing and it seems there is a lot of
leverage to buy South African coal. They might be able to do so now as India’s
total import is 60mn t. But it will likely be a different story next year, when their
import requirement rises to 90mn t.

Optimism for prices to go higher in 4Q
There was general optimism for coal price to go higher in 4Q on the back of
stronger demand from China, India buying, Korea spot tender, and additional
demand from Japan in October – which is consistent with our view.

Royalty could be hiked
We gathered that starting 2009, there is no more deduction of cost, such as
barging, demurrage/dispatch, insurance, and other direct costs allowed and
royalty is calculated based on point-of-sale price. Previously, royalty would be
calculated based on deemed point of sales being the last load out facility owned
by the mine owner and such costs are deducted. We are not aware of such
development, having been implemented since 2009 considering coal companies
continued to pay 11-12% effective tax rate (vs. 13.5%) in the past two years. A 1-
2% increase in royalty could impact earnings by 5-9%.