AUGUST 2017 FORBES INDONESIA | 27I FOUND an interesting fact
when I last looked at the most re-
cent data on Indonesian exports:
As of May 2017, coal exports to-
taled $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- 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 op-
erational spending, lifting the cost of production as high as
$60 a tonne, including gener-
ous 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. To-
day, many firms can produce
coal at about $28 per tonne.
Thus, if coal firms can main-
tain 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 govern-
ment is moving ahead with the 35 GW power plant proj-
ect, 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 depen-
dence on imported fuel oils).
Finally, we must remember this industry moves in cy-
cle. 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 mar-
ket, at 2.4 PBV. The only question left to answer is which
coal stock should you buy now? FCOAL SHINES AGAIN
TEGUH HIDAYAT IS AN INDEPENDENT FULL TIME INVESTOR IN INDONESIAN STOCKS AND FUND MANAGER. SINCE 2009, HIS SPECIALTY IS VALUE INVESTING, TRYING TO FIND
PROSPECTIVE INVESTMENTS AT THE LOWEST POSSIBLE PRICE. TO READ HIS OTHER WORKS OF STOCK ANALYSIS, PLEASE VISIT WWW.TEGUHHIDAYAT.COM (IN INDONESIAN) AND
WWW.THPARTNER.COM (IN ENGLISH).INVESTMENT IDEAS TEGUH HIDAYAT
As of May 2017,
coal exports to-
taled $8.4 billion
from the start of
the year, up 57%
over the same
period in 2016.REUTERS