China will ban thermal coal import below 4500kcal/kg NAR

Coal Sector:  China plans to ban coal import below 4,500kcal/kg NAR (Under weight)

China will ban thermal coal import below 4,500kcal/kg NAR. Based on a channel check (sourced from IHS McCloskey) has reported yesterday that China’s National Energy Administration (NEA) has released a draft regulation proposing to ban coal import with a CV below 4,500kcal/kg NAR, which may translate into around 4,800 – 5,000kcal/kg GAR depend on the moisture content. In our view, this policy is to align with China’s government commitment to reduce carbon emission and protect the national interest for its domestic coal products.

Potential pressure on Indonesia’s CAD. We expect at least 20% of Indonesia’s coal export below 4,800kcal/kg GAR may need to relocate either into domestic or India market if this China’s policy is becoming effective. It would definitely have negative pressure to Indonesia’s current account balance as coal export accounted for 14% of total Indonesia trade export (as of FY2012).

Big losers: ADRO, KKGI and ABMM. The biggest losers in our view are low rank coal exporters like ADRO (Sell , TP:Rp1,000), INDY (Not rated), KKGI (Not Rated) and ABMM (Not Rated) due to their bigger exposure to China and India market. Integrated coal-to-power project become imminent goals in near-mid term, otherwise ADRO’s balance sheet will be at risk due to its recent aggressive low rank coal M&A below 4,200kcal GAR.

Big winners: ITMG, HRUM. We believe if this regulation become effective, the pricing gap will be widening due to different grades and interestingly from supply and demand dynamics it would favor higher rank coal producers (above 5,000kcal GAR) such as ITMG (Sell, TP: Rp30,600), HRUM (Neutral, TP: Rp4,200), due to some demand disparity from the biggest emerging country, China.

Neutral and mixed on PTBA, BRAU and BUMI. Despite PTBA’s coal export mostly above 4,800kcal/kg and would likely to gain more premium in pricing, however potential abundant supplies flooding into domestic market may likely to increase the price gap and hit PTBA’s domestic sales. So overall the net effect to PTBA is neutral as currently domestic and export sales is balance at about 50:50. While for BUMI and BRAU, both are mixed due to some exposure to Ecocoal (Arutmin) and pretty big exposure to domestic market.

for Indonesia Market Summaries 15 May 2013