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Senin, 06 Juni 2011

Indonesia Coal - Alert: Key Takeaways From Coaltrans Conference - Citigroup

We attended the 17th Annual Coaltrans Conference in Bali. The 3-day conference was well-attended with more than 1,800 delegates. The key takeaways from the conference are as follows:
Producers: moderately bullish on coal prices — A panel of 5 largest producers expected coal prices to rise moderately by USD10-20/t in 2012 on surging demand from India and higher import from China. The panel is of the view that demand from China will be the largest single factor driving coal prices for the rest of the year.

High reliance on Indonesia and Australia — Rudi Vann of Wood Mackenzie expected that the two countries would account for c. 75% of seaborne supply growth from 2010-20. Two of the top 5 exporting companies globally are Indonesian (Bumi and Adaro) and by 2015 they will be two of the top three. He estimated that Indonesian coal companies would need to invest c. USD5b in 2011-15 to boost national production to 550m tons by 2015 from c. 340m in 2011.

Weak USD steepens cost curve — Neil Dhar of Noble highlighted that the currency strength of the main coal-producing countries (China, Australia and Indonesia) against USD puts substantial cost pressures on coal companies. Already, the third and fourth quartile producers are facing rapid cost inflation. He opined that this is bullish for coal prices in the long-term.

Regulatory issues — Zulkifli Hasan, Forestry Minister, stressed that the forest moratorium applied only for the primary forest and peat land areas. However, as the majority of current coal mining activities are not in those areas, there is little impact from the moratorium. But this could impact mine expansions if they are moving to the restricted areas. The Minister assured that it will take 3-6 months for borrow use permits to be approved by the Ministry provided that there are no overlapping issues and the company has secured all the necessary recommendations from the local government.

Stock recommendations — Our top pick is Adaro, which we see as likely to surprise positively on earnings as market expectations have been substantially toned down on underwhelming 2H10 results. Robust production growth on more supportive weather and substantially higher ASP should lift earnings. We also have a Buy on ITMG as we see an earnings turnaround in 2011E.

Catalysts — We expect robust Y-Y earnings growth on higher production and better ASP to prop up earnings in 2Q-4Q11. This, coupled with our expectation of improving spot coal prices on a resumption of Chinese purchases from the seaborne market, should improve sentiment toward the sector.

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