Coal To Remain King Amidst Growing Challenges

BMI View: While many developed markets are shifting towards the usage of greener alternatives, we believe coal will remain the mainstay of Asia's overall energy portfolio. Aggressive electrification needs, coupled with greater industrialization will continue to power regional demand and drive production of the mined fuel. That said, several issues with antiquated infrastructure and growing environmental opposition being the most pertinent will remain obstacles to further coal production in some countries.

D espite the growing focus on renewable energy sources in many developed markets, we b elieve coal will continue to dominate the bulk of Asia's energy portfolio over the coming years . Coal will retain its primacy in many countries, principally China and India. While risin g environmental concerns have instilled greater awareness towards the usage of greener alternative s, we expect Asia to remain heavily reliant on coal-powered electricity generation over the next decade. C oal has been the cheap energy source for generating electricity globally and has helped power the rise of manufacturing hubs in Asia . Electricity from coal-powered plants is not susceptible to the vagaries of weather, and can more easily satisfy base-load demands without interruption.

Uptrend Intact
Spot Newcastle Steam Coal, 6700kc GAD fob (US$/tonne)

Thermal Coal Prices On Firmer Support

Our expectation for the recent uptick in Newcastle steam coal to remain intact will lend economic credence for further output expansion (See our online service, 'Thermal Coal To Average US$90.0/tonne In 2013') . Additionally, the growing industrialisation of emerging markets such as India and Indonesia will lift steel consumption and encourage miners to step up investment into coking coal mines. Nonetheless, we believe several challenges on multiple fronts will continue to stifle coal production in certain countries, with issues concerning antiquated infrastructure and growing environmental opposition being the most pertinent. Indeed, coal mining activities are often linked to the problems of environment degradation and social distress. In our opinion, a brighter outlook is in store for thermal coal prices as compared with coking coal. Given its primary usage in steel production, our below consensus view on the Chinese economy will see China coking coal import growth slow over the coming quarters. Consequently, coking coal prices will struggle to head much h igher in the medium term as Chinese economic growth disappoints.

Growth To Retreat On Mounting Challenges
Select Countries - % Change In Coal Production

Australia: Rising Cost s Clouds Mining Prospects

Coal miners in Australia have been facing an increasingly d ifficult operating environment as a combination of rising cash costs, softening commodity prices , higher taxes and a soaring Australian dollar coalesce to present a modest growth picture at best. T he average c osts of producing coking coal in the country have risen from approximately US$47/tonne in 2005, to US$84/tonne in 2011. Although a steady stream of large projects and expansion plans will continue to d rive growth in the coal sector , we believe a sharp deterioration in coal prices might herald a wave of capital expenditure plans being cancelled or delayed . Overall, we forecast Australia's coal output (both coking and thermal coal) to reach 468mnt (million tonnes) by 2017, marking an annual average growth of 2.9% from 2011 levels.

Rising Costs Threaten Mining Projects
Australia - Coking Coal, Average Mining Cash Costs (US$/tonne)

China: Coal Still Booming Despite Green Initiatives

Although the Chinese government is undertaking aggressive plans to boost the country's so far limited green credentials, we believe coal will continue to dominate China's overall energy mix in the years ahead. This is in stark contrast to western markets and in particular the United States, where the glut of cheap natural gas is eroding coal's dominant position as a source of fuel for power plants . As compared with oil and gas, coal is cheaper to mine and easier to transport using existing infrastructure such as roads and rails. Additionally, the sheer magnitude of the existing coal-fired power infrastructure gives the fuel an edge over other alternatives in the short-to-medium term. China is largely self-sufficient in coal production, with coal imports at only 5% of the country's total output in 2011. However, we note that the sheer size of China's coal consumption will make it hard for domestic producers to satisfy even minor increases in demand. While imports of coking coal will be affected by our below consensus view on the Chinese economy, we expect China to remain dependent on thermal coal imports for power generation needs.

Coal Dominates
China - Total Power Generation, By Type (TWh)

India: Burgeoning Demand To Fuel Overseas Ventures

We expect coal to retain its primacy in India as the country undergoes rapid industrialisation and urbanisation , spurring greater imports of both coking and thermal coal in the coming quarters . We forecast India's steel production to grow at an annual average rate of 9.1%, to reach 121mnt by 2017 and expect the construction industry to account for the bulk of incremental steel demand. The growing affluence of Indian consumers will spur spending on housing and white goods, making India the key driver in steel demand after China in the coming years.

Despite ambitious plans by the Indian government to boost domestic coal production, we expect the country's reliance on coal imports to grow over the coming years. It is estimated that only 16% of the 22bnt (billion tonnes) of coking coal reserves in India is hard coking coal, the majority of which are difficult to extract as they are located in heavily populated areas. Furthermore, a combination of obstacles with vital regulatory and bureaucratic hurdles being the most pertinent will continue to sap growth in the coal sector, while burgeoning demand for coal resources will fuel an increasing number of Indian companies to embark on overseas ventures. In this respect, we believe southern Africa is well-placed to benefit from India's increased coal demand. Mozambique hosts some of the world's largest coal reserves due to come on stream in the next few years, while Botswana and Zambia are home to world-leading undeveloped coal resources.

Bountiful Coal Deposits
Southern Africa - Map of Coal Deposits

Indonesia: Production To Forge Ahead, But Uncertainty Remains

We are generally upbeat over the future prospects of Indonesia's coal sector and forecast production to remain strong over the coming years. In view of a host of positive factors that will continue to forge output growth, we expect coal output to reach 656mnt (million tonnes) by 2017, growing at an annual average rate of 10% from 2011 levels. We believe Indonesia's advantageous positioning to key Asian markets, coupled with favourable geology and infrastructure developments will continue to facilitate the rise of the coal industry. The good match between the low-ash, low-sulphur make up of Indonesian coal with regional power plants will continue to support coal production in Indonesia. That said, we warn that the government's impending move to impose a quota system on local coal production is a cause for concern. Under the new system to be implemented in 2014, each coal producing region will be assigned with an annual mining quota in a bid to address rising environmental concerns and to conserve resources for domestic use.

Infrastructure Developments To Propel Mining Growth
Indonesia - Infrastructure Industry Value & Growth

Japan: Growing Imports With Nuclear Turn-Offs

We believe Japan's hunger for coal imports will grow over the coming years in the face of nuclear turn-offs following the Fukushima disaster in 2011. The large-scale switch away from nuclear energy will translate into higher coal imports as an increasing number of domestic utilities keep thermal power stations running at full capacity. Nuclear power provided approximately 26% of Japan's electricity needs in 2010. However, the share of nuclear energy in Japan's overall energy mix has since fallen precipitously to less than 2% in 2012, with only two of the country's 50 reactors currently in operation. Although our power team is expecting more nuclear reactors to come online over the next decade, the share of nuclear energy in Japan's energy portfolio will nonetheless, still be below the pre-Fukushima levels. Our power team expects the share of nuclear in Japan's energy portfolio to increase by 10% between 2012 and 2022.

Nuclear Still Below Pre-Fukushima Levels
Japan - Electricity Generation By Type (%)

South Korea: Hunt For Overseas Coal To Continue

As evident by the string of overseas ventures in recent years, we believe more South Korean companies will continue to hunt for coal mining assets abroad . This is especially when many South Korean utilities have been experiencing delays in attaining supplies from China and Australia, due in part to the long queue of ships awaiting cargoes at Australian ports. Indeed, t he growing demand for coal by domestic generators has fuelled a wave of coal mining investment in foreign markets such as Indonesia and South Africa . South Korea's government has recently approved the construction of eight coal-fired plants by private operators including Samsung C&T , Tongyang Power and Dongbu Group in the country. These plants, capable of generating 8,000MW (megawatts) in total , are due for completion by 2027.

Major Asian Coal Producers - Financial Data
Source: BMI, Bloomberg. Note: Data corresponds to latest annual financial results.
Company Country Market Cap (USDmn) Revenue (USDmn) Net Income (USDmn) Profit Margin (%) PE Ratio
China Shenhua Energy Co Ltd China 70,823 39,663 7,743 19.5 9.3
Coal India Ltd India 35,004 13,071 3,097 23.7 12.9
China Coal Energy Co Ltd China 14,493 13,617 1,471 10.8 7.7
Yanzhou Coal Mining Co Ltd China 11,085 9,216 986 10.7 7.3
Inner Mongolia Yitai Coal Co Ltd China 9,385 5,006 1,023 20.4 6.3
Adaro Energy Tbk PT Indonesia 4,239 3,722 385 10.4 11.0
Indo Tambangraya Megah Tbk PT Indonesia 3,935 2,439 432 17.7 9.0
Tambang Batubara Bukit Asam Persero Tbk PT Indonesia 3,409 1,237 309 25.0 11.4
New Hope Corp Ltd Australia 3,391 695 172 24.7 24.0
Whitehaven Coal Ltd Australia 2,255 638 65 10.1 66.0
Asia - Coal Production Forecasts
e/f = BMI estimate/forecast. Source: BMI, EIA
2007 2008 2009 2010 2011 2012e 2013f 2014f 2015f 2016f 2017f
Production 390 391 403 420 395 415 429 447 456 458 468
% Chg y-o-y 6.2 0.2 3.1 4.2 -6 5.1 3.3 4.3 2 0.4 2.2
Production 2,491 2,766 2,927 3,196 3,473 3,650 3,818 3,986 4,145 4,299 4,445
% Chg y-o-y 6.7 11 5.8 9.2 8.7 5.1 4.6 4.4 4 3.7 3.4
Production 482 516 556 565 578 606 638 674 713 753 797
% Chg y-o-y 6.3 6.9 7.8 1.6 2.3 4.8 5.4 5.5 5.8 5.7 5.8
Production 261 274 302 336 371 401 445 496 564 613 656
% Chg y-o-y 15.1 5 10.2 11.4 10.4 8.1 10.9 11.6 13.7 8.7 6.9
This article is tagged to:
Sector: Mining, Power
Geography: Australia, Asia, Australia, China, Indonesia, India, Japan, South Korea, Asia, Asia