Coal Shines Again
Category: Column By : Teguh Hidayat Read : 147 Date : Wednesday, August 02, 2017 - 10:21:12

I found an interesting fact when I last looked at the most recent data on Indonesian exports: As of May 2017, coal exports totaled $8.4 billion from the start of the year, up 57% over the same period in 2016. The increase in the value of coal exports, as you may already know, is mainly caused by higher prices, not more output. The Australian Newcastle coal price benchmark for May 2017 was $80, up significantly from the same month in 2016 when it was just $55. In fact, the price had gone as high as $110 in November 2016, before consolidating at current levels.

Naturally, the stock prices of coal miners also have seen dramatic increases as well, shaking off the slump that started in 2011 and which hit its bottom in early 2016. The IDX’s mining index rose 71% through 2016, far above the 15% gain in the composite index. Entering 2017, the financial statements of coal companies have now begun to reflect the rising coal prices. Yet, because the price has cooled down from $110 to $80 a tonne, investors may still have a chance to buy coal stocks.

For sure, coal stocks gained plenty in 2016, in some cases hundreds of percent, but let’s not forget that’s off a base price, in some cases, down 90% from their peaks in 2011. Thus, many remain below where they were five or six years ago, and valuations remain reasonable. Currently, in the market, some coal stocks are below two PBV, while their ROE is already more than 20%.

The question now is: will coal prices rise as high as 2011? Many in the industry doubt that is possible, because Chinese demand has fallen, perhaps on a permanent basis. When coal prices rebounded in mid-2016, it was not because the world’s demand was rising, but because coal prices have dropped even below the adjusted supply and demand. While Chinese demand may not return, it is still that about half the power plants worldwide still need to coal for fuel.

As long as the Newcastle benchmark does not fall back to $50 per tonne, coal companies will still earn a decent profit because their production costs also significantly dropped. During the boom years, coal firms were extravagant in operational spending, lifting the cost of production as high as $60 a tonne, including generous salaries for staff. As prices dropped, firms had to slash costs in order to survive—and the drop in oil prices helped them, so the fuel costs for their equipment also fell. Today, many firms can produce coal at about $28 per tonne. Thus, if coal firms can maintain their efficiency, they have margins almost as good as in 2011. Some think the long-term price of coal should stabilize around $72, implying even better margins.

Domestic demand should also do well, as the government is moving ahead with the 35 GW power plant project, slated for completion in 2019. If that can be realized, coal demand should jump from today’s 80 million tonnes a year to more than 200 million tonnes, as almost all the new plants being built will be coal-fired (to reduce the dependence on imported fuel oils).

Finally, we must remember this industry moves in cycle. The last cycle started in the early 2000s and peaked in 2011, lasting about a decade, before hitting its low in 2016. If this is the start of a new up-cycle, then the rise of coal is only the beginning of a multi-year rally. Coal stocks, at PBV of 2 or below, remain below the average for the market, at 2.4 PBV.  The only question left to answer is which coal stock should you buy now?