The outlook for Indonesian coal producers appears promising with strong volume growth coming from both domestic and export market. Despite the delayed completion on the 10,000MW coal-fired steam power plant (PLTU) project, we expect to see additional electricity capacity starting in 4Q09. PLTU Labuan (2x300MW) is scheduled to operate its first unit in September 2009 and the second unit by December 2009.
PLTU Rembang (2x315MW) and Indramayu (2x330MW) should start to operate by January 2010. As nine out of 10 projects in Java-Bali are in their construction stages, there should be a total add-in capacity of 6,830MW by end of 2010. Six PLTU projects (162MW) outside Java-Bali region have started the construction stage in 2Q09 with additional 5 to follow suit this year.
On recent update, the Government of Indonesia has finally approved the coal volume required for domestic market obligation (DMO) at 75m tons p.a. start from 2010, 10.3% higher y-y from 68m tons domestic consumption estimate in 2009. The volume set for DMO accounts for 30% from the 2010 total estimate of coal production at 250m tons or up 8.7% y-y from 2009 estimate at 230m tons (chart 1). PLN itself has signed 20-year coal supply contracts, effective once the PLTUs are operational, amounting to 30m tons per year of low-rank coal.
We foresee that the implementation of DMO has limited the flexibility for coal producers to aggressively penetrating the export market. On top of it, the government has recently shown its intention to apply a restriction on export quota at 150m tons p.a. start from 2010. The regulation would also require each coal producer to allocate 25% of its total coal productions for the domestic needs, or to face penalty on full restriction to export. We, however, view that the regulation might not be necessary due to the expected increase in the coal production volume going forward, exceeding the domestic demand requirements.
On a more positive tone, the government seems willing to accommodate Indonesian coal producers’ wishes for minor intervention in regulating sales price for coal DMO. Sales price will be on reference to the international market price to avoid high spread between the export and domestic pricing. Based on the Newcastle Index, y-t-d coal price has averaged USD70.7/t. Although having trended down since 4Q08, coal prices have been relatively steady throughout 2009. We believe that coal price has found its new equilibrium at current levels, supported by stronger demand from higher energy needs mostly in the South East Asian region. Hence, we now expect coal price to average USD75/t in 2010.
Government also plans to cut the royalty tax rate (DPHB) on the low calorific value coal. The proposed DPHB rate is 9% for coal with CV<5,000kcal/kg (vis-à-vis 13.5% previously) and 7.5% for CV<4,500kcal/kg. We view that upon implementation, lower royalty rate will give incentive towards growth expectation in the sector.
Stronger domestic demand starting from 2010 paired with recovery from global demand will provide higher volume support for demand on both thermal and coking coal. We view that India will provide the highest growth in thermal coal demand, boosting imports by about 18% to 40m tons beginning this year, in line with the government’s plan to double coal-fired electricity generation capacity by 2017. Indonesia has also made preparation to start the 10,000MW project phase II which is scheduled to start in 2012 and to operate by 2014. Coal-fired power plants will take around 48% from total portion of 9,963MW. Furthermore, coal supply may not grow at the same pace as demand due to export restrictions set on major coal exporters, such as Vietnam and China to secure their domestic needs. Supported with the fact that the China government has decided to reduce its export quota by 50% from 40m tons to 20m tons. As one of the world’s major coal importers, Indonesia will certainly have the upper hand in the tightening supply of coal.
