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Coal Price in 2022 Estimated at US$100 per ton, ITMG Becomes Top Pick

November 23, 2021
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The assumed average coal price in 2022 is estimated to be around US$100 per tonne in line with the potential for lower demand from China and India.

Through research entitled Coal (Overweight/Maintain) – Coal price may fall but still in favorable level, Mirae Asset Sekuritas Indonesia analyst Juan Harahap said that China has accelerated the approval of new coal mines to ease its electricity crisis in 2021.

Based on Bloomberg, about 220 million metric tons of brownfield coal capacity has been given the green light and 120 million tons is still pending. Considering that some of the capacity comes from coal mines that have expired, it is necessary to carry out safety check procedures before production.

“Therefore, we expect to see a significant increase in domestic coal production in China in 4Q21. As China still has to face the winter season combined with Lunar New Year's Eve, we expect China's import level to start to decline at the end of January 2022, as domestic production will increase its production after Chinese New Year's Eve. Historically, China has always recorded the lowest production in every first quarter.”

On the other hand, domestic coal producers in India have increased production under the direction of the government throughout 2021. As a result, India Coal Ltd managed to increase its production level to 157 million tons ( +36.4% qoq; +6.3% yoy) in third quarter/2021.

Juan noted that India Coal Ltd contributed around 84.1% of coal production in India in 2020. As a result, India recorded lower coal import activity of 30 million tonnes (-34.7% qoq; -16.6% yoy ) in 3Q21.

Meanwhile, India's coal inventories plummeted to 221 million tonnes (-41.4% yoy) in 9M21, the lowest level since 2015 inventory levels. However, he expects India's domestic coal production to continue to increase, so India's coal imports may continue to fall. in 2022F.

“For India's coal inventories, we think the September figures are an early sign that coal inventories will recover on the back of higher domestic coal production going forward.”

Furthermore, Juan explained that the United Nations Conference of Parties held a meeting in Glasgow from 31 October-13 November for the 26th annual summit (COP26) to tackle climate change.

In terms of coal, although China and India are pushing to move from an 'exit phase' to a 'gradual downgrade' in the deal agreed in Glasgow, Juan sees that there is an improvement of nearly 90% of the world economy which has set targets for net income. zero of 30%.

“Therefore, we believe that this will hamper coal prices in the near future. It should be noted that COP27 will be held in November 2022. Although we see a lot of pressure on the coal industry, we still see China's coal demand will persist in the medium term, as there is a large amount of thermal power generation capacity installed in China. We note that China's coal-fired power plants operating throughout 2020 increased to 1.0 million MW (+4.2% yoy).”

Juan maintains overweight demand in Indonesia's coal sector, although he expects the assumption that the average coal price in 2022 will drop to US$100 per tonne from US$126 per tonne due to: 1) potential lower demand from China and India, due to the surge domestic coal production in 2022F ; and 2) disruption of renewable energy.

However, Juan estimates that the transition to renewable energy will still be challenging in the near term, and the assumption of a coal price of US$100 per tonne in 2022F is still profitable for the Indonesian coal industry.

“We prefer ITMG as our main choice because it is very concentrated in the thermal coal business. It also has most of the characteristics of medium to high calories, the largest portion of exports in our range that will support margins, and lastly a high dividend yield.”