Asia On The Ground: Indonesia Coal - UBS Investment Research

Please mine the gap
􀂄 We met with several Indo coal operators throughout March In light of recent production disappointments throughout the Indonesian coal sector, we met with leading industry sources throughout March. These included contractors, unlisted producers, traders, shippers and an EPC company.
􀂄 Looking for signs of continuous production pressure Our key objective was to get an industry view on 1) why several coal producers keep over-promise and under-deliver on production; 2) whether production pressure will continue; and 3) which producers are most likely to meet their target.
􀂄 Production will continue to disappoint; good for regional prices Our findings suggests that despite growing investment, it will take at least twothree years to resolve the multi-bottleneck constraints putting downward pressure on production. And that will require a major revision of Indonesian land reclamation law, not to mention construction time. And even assuming perfect weather conditions (as weather usually takes the blame for production misses), we believe several producers will struggle to meet targets. Given Indonesia’s position as the world’s largest thermal coal exporter that should render support to regional coal prices, thus offsetting earnings pressure from lower production growth.
􀂄 UBS view and action: Look for producers with strong track record Producers with attractive production growth profiles or historical strong track records include Banpu Thailand, ITMG (Neutral) and Straits Asia (Buy). Smaller producers will be more likely to meet production targets on account of their relatively smaller requirement for land and infrastructure.