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Indonesias thermal coal output cuts seen unlikely to boost prices

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Singapore (Platts)--19 Aug 2015 427 am EDT/827 GMT

Thermal coal output cuts in Indonesia in 2015 may not lend much support to prices amid muted Chinese demand that cannot be outweighed by interest in emerging markets, market sources said Tuesday.

Major Indonesian thermal coal miners including Adaro Energy, Bumi Resources and PT Harum lowered production in the first half of 2015 from the year before as prices continued to head south.

"The fall in production has not been enough to see any form of price recovery," said Matthew Boyle of London-headquartered commodities consulting firm CRU.

"The oversupply has seen sub-bituminous coal prices under pressure and they are unlikely to recover in H2 or in 2016."

Most Indonesian thermal coal exports are sub-bituminous, with a calorific value of less than 4,800 kcal/kg NAR, he noted.

"While some production cuts are positive, they are not enough to bring the balance back, so pricing could remain poor beyond 2016," Xavier Jean of Standard & Poors said. Standard & Poors, like Platts, is a unit of McGraw Hill Financial.

Adaro Energy recently posted a 7% year-on-year fall in output for H1 amid oversupply and weak demand.

The company, which has mines in South Kalimantan province and produces coal with a heating value of 4,000-5,000 kcal/kg GAR, said sales of its lower calorific value 4,000 kcal/kg GAR material in H1 slumped 78% year on year.

"Market conditions were particularly tough for low-CV coal as supply for 4,000 kcal/kg-type coal was plentiful," the company said in a H1 report.

"The coal market remains challenging in the near term."

Bumi Resources said its thermal coal output fell around 14% year on year over January-May, while the average selling price was down 12.6%.

"I would doubt [any price recovery] as we are entering the seasonal period when prices are traditionally very low," the companys director and corporate secretary Dileep Srivastava said.

"There is no trigger to signal a possible upturn as yet."

Srivastava said the company would maintain full year 2015 output at last years 84 million mt level "unless the market price improves significantly."

Indonesias combined output totaled around 425 million mt in 2014, with domestic consumption accounting for roughly 18%.

The country has set an ambitious target of adding 35,000 MW of power generating capacity by 2019, mostly at thermal-coal fired plants.

"You might be looking at a 5-10% decline in production [this year] in Indonesia and maybe at the higher end of this range for exports given that demand in Indonesia is still growing, though very slowly," Jean said.

FALLING CHINESE IMPORTS HURT

Falling imports in major buyer market China has put several Indonesian thermal coal miners on the back foot as they seek new homes for their cargoes.

Chinese coal imports have fallen around 43% year on year to date in 2015 after the government introduced a series of measures aimed at curbing imports and boosting the ailing domestic sector.

The devaluation of the yuan was also weighing on international suppliers.

"Given the devaluation of the yuan and other weak demand data from China, I do not foresee any huge surprise demands coming from China," Stuart Murray of Asian Commodity Consultants Ltd. said.

Chinese domestic prices are low and the countrys industry and coastal power stations would look to seaborne thermal coal only if it was comparatively cheaper, CRUs Boyle said.

"I believe in the current market, there is no financial incentive for seaborne thermal coal imports to be delivered into Southeast China, and Chinese coastal demand will be met predominantly by domestically-sourced coal," he said.

Chinas winter stockpiling, which typically begins around Golden Week in October and lasts until Chinese New Year in January or February, usually boosts thermal coal prices by $7-$15/mt, Murray said.

"I would be very surprised if this years winter increase was more than $10/mt given the current weak demand," he added.

China may also start looking to export coal after the "sudden" currency devaluation, Srivastava said.

Chinas government this year also reduced the tax on coal exports to 3% from 10% earlier.

"In the current market there is no expectation that demand will return any time soon, but there is a real danger of China increasing its exports to South Korea and possibly Taiwan, which could be a huge threat to Indonesian producers," Murray said.

With the exception of India, Srivastava said volumes to emerging markets like the Philippines, Vietnam and Thailand were not significant enough to offset weak Chinese demand.

Jean agreed, saying: "Every little helps, but demand from those countries is not material enough to move the needle much."

Malaysia is likely to take the lead in increasing thermal coal demand after the startup in March of Asias first ultra-supercritical power station increased its forecast for imports to 29.8 million mt in 2015 from 22 million mt in 2014, Boyle said.

Vietnam is also expected to become a net importer of thermal coal from 2016, with plans to increase its imports to around 22 million mt by 2020 from a forecast of 6.7 million mt in 2015, Boyle added.

Traditionally a coal exporter, Vietnam has turned to imports to meet rising domestic demand, particularly from the power sector.

However, in the longer term, demand for thermal coal may weaken as most governments are under pressure to address rising pollution levels and emissions, Murray said.

--Deepak Kannan, deepak.kannan@platts.com
--Edited by Wendy Wells, wendy.wells@platts.com
Posted by : admin [ 8/19/2015 6:21:00 AM ]