Softening prices of Asian liquefied natural gas (LNG) in the past months may exert downward pressure on demand for high-calorific value (CV) Indonesian coal, as buyers could potentially switch to the relatively cheaper alternative, Trimegah Securities stated in its recent mid-year research note.
An easing LNG price makes the cost advantage of producing electricity from coal lesser competitive than LNG usage for power generation , which in turn may shrink the demand for coal, opined Sandro Sirait, equity analyst at Trimegah Securities.
He further stated, “We expect the trend of switching from coal to LNG to be reflected more in Japan, being a key buyer of high CV coal and one of Asia’s biggest LNG importers”.
Ample supplies and concerns about ongoing trade war between China and the U.S. would slow China’s economic growth have sent LNG prices spiraling down to a 3-year low of US$4-5/mmbtu.
Ramli Ahmad, director at Singapore-based coal trading firm Madison Energy, said lower LNG price is unlikely to spur significant switch from coal to LNG.
“There are more coal-fired power plants than gas-fired power plants. It means the dependency on coal is still high”, said Ahmad in a phone interview recently.
Because of the potential competition from LNG, Trimegah Securities adjusted its assumption for Newcastle high cv coal price to USD 80/ton this year with long term price of USD 65/ton, easing from averaged USD 105.9 in 2018, Trimegah shows in its note.
Low-CV Indonesian Coal Favoured
While supply-dynamic remain little changed, Trimegah Securities still favour low cv coal, particularly with potential higher demand from Indonesia’s new power plants commencing in 2020, said Sirait.
Indonesia has been pushing for development of new power generation with coal accounts for more than 50% of the new generations. For 2019, the government has set domestic coal sales of up to 25% from total production. The country’s domestic coal sales obligation have risen to 115 million tons from 76 million tons in 2014.
“Domestic coal prices are still strong. There will be more shipments to domestic market,” said Ahmad. But Ahmad acknowledges that there will be a stiff competition to tap shares in the country’s domestic market with top coal producers, such as Indonesia’s largest producer, PT Bumi Resources, PT Adaro Energy, and state miner PT Pertambangan Bukit Asam.
Trimegah Securities forecasts price of low cv coal would average USD 35/ton this year compared to average USD 44/ton in 2018.
As for price index of 4200 GAR, Trimegah Securities expects the price to normalize to be USD40/37.5/35 per ton with long term coal price of USD30/ton starting 2022. The securities noted that while the YTD coal price average is USD43/ton, it recently reached USD29/ton due to the China’s coal import ban.
“We think that the low CV coal price will rebound next year as we argue that China’s import ban will be reversed after winter season”, said Sirait in the note.
“China would still need to import Indonesia’s coal (mainly low CV) that has low ash and low sulphur quality”, he added.
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