Coal stock rally may last until mid-2017

Prima Wirayani

The Jakarta Post

The ongoing domestic coal stock rally may only last until the middle of next year as the recent surging price of coal is seen as temporary, analysts say.

The Chinese government’s recent decision to curb coal production made benchmark thermal prices from Newcastle port soar to a nearly two-year high of US$79.1 a ton last Monday, from $53.37 per ton in January, the lowest in almost a decade.

That more than doubled the stock prices of publicly listed coal miners so far this year, with Adaro Energy soaring 183.5 percent, Bukit Asam 174.6 percent and Indo Tambangraya Megah 144.5 percent. The broader benchmark Jakarta Composite Index (JCI) has gained 17.8 percent year-to-date.

“The current rebound is justified, but be careful as this is of a temporary nature,” said Samuel Asset Management analyst Daniel Soegiarto, forecasting that the rally would persist until the middle of next year when coal demand peaks during winter.

In the first half of next year, as demand cools down, China may start to control the “too hot price” until it reaches a reasonable level that is still higher than what was recorded at the end of last year, he added, warning that coal miners’ stocks were sensitive to price changes.

The mining subindex at the local bourse rose the most among other sectors so far this year at 56.1 percent, after slumping by -40.75 percent last year.

Koneksi Kapital research head Alfred Nainggolan predicted the coal price rally would not be as steep as recently and would stabilize at around $80 per ton next year, close to the current level.

If prices stayed at that level, he added, coal miners would still be able to book profits as some of them may have yet to enjoy the prices before entering into new contracts.

Efficiency measures taken by coal companies earlier this year also play an important role in jumping stock prices as they enable the firms to book higher profits, Alfred said.

The country’s biggest coal producer, Kaltim Prima Coal, plans to take advantage of the price rally by signing new contracts based on the recent high prices, in hopes of boosting revenue.

It also renegotiates contracts with contractors and suppliers by offering them longer periods and bigger amounts of coal so that it can get discounted prices and eventually lower the firm’s costs, Kaltim Prima Coal’s chief financial officer Ashok Mitra said recently.

Daewoo Securities Indonesia analyst Taye Shim expressed optimism that the rise in coal prices would sustain given the sizeable supply disruption from China, seasonal increase in demand for winter and greater domestic coal demand in Indonesia from the 35,000 megawatt power plant project.

“Given the coal sector was a long-forgotten sector over recent years, we think this sharp rebound in coal prices and coal stocks took investors by surprise,” he said.

China has struggled to balance capacity cuts against rising prices. Its government earlier this year pursued policies aimed at eliminating outdated and inefficient coal producers while helping support larger, modern miners struggling with prices that tumbled to the lowest in almost a decade, Bloomberg reported.