CITIC Securities: Domestic coal prices are expected to gradually enter an upward trend, with price increases having sustained momentum.

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CITIC Securities Research | Written by Guo Peng, Zhao Bolin, Huang Jie

This round of Middle East geopolitical conflicts has lasted over three weeks, with overseas oil and gas prices showing strong and sustained increases; although domestic and international coal prices are relatively weak, we believe that as the conflict persists and energy prices transmit, domestic coal prices are expected to gradually enter an upward trend, with price increases likely to be sustained. We remain optimistic about the sector, recommending companies with coal chemical operations and relatively advantageous valuations, and also paying attention to overseas companies with coal resource layouts.

▍ Overseas energy prices continue to rise steadily, likely to drive ongoing improvement in domestic coal price expectations.

Since the outbreak of the Middle East conflict three weeks ago, domestic coal prices have performed below expectations, but overseas oil and gas prices have continued to rise, outperforming the same period during the Russia-Ukraine conflict. We believe that the impact of this Middle East conflict on global coal supply contraction is gradual, and sustained high oil and gas prices are expected to boost global high-calorie coal consumption, raising the coal price center in Asia-Pacific, which is positive for domestic coal price expectations.

▍ Domestic coal prices may end short-term weak fluctuations and enter a steady upward channel.

After the Middle East conflict erupted, domestic coal prices did not follow overseas energy prices sharply but mainly fluctuated weakly, partly due to the gradual off-peak season for power generation and coal consumption. However, we believe three short-term factors will support thermal coal prices to enter a steady upward trend: 1) improved chemical profits may boost chemical coal demand, driving coal prices up; 2) industry data for the first two months show year-on-year improvement, suggesting the full-year fundamentals may be better than expected; 3) ongoing conflict keeps overseas coal prices at a premium. Meanwhile, coking coal prices are also expected to remain stable or rise amid inventory replenishment and improved coking profits.

▍ Over the past three weeks, sector excess returns have continued to expand, with the thermal coal sub-sector performing best.

During this Middle East conflict, the coal sector’s excess returns have been significant, increasing weekly from 6.39% in the first week to 15.79% after three weeks. The absolute best performance was from the thermal coal sub-sector, mainly because overseas oil and gas price increases have the most direct impact on thermal coal, and leading thermal coal companies all have coal chemical operations. Looking ahead short-term, we expect thermal coal to maintain steady growth amid domestic price rises, with coking coal showing greater upside potential.

▍ Risks:

• Geopolitical conflict easing or overseas coal production cuts falling short of expectations, leading to systemic declines in international coal prices;
• Fluctuations in macroeconomic growth affecting coal demand and prices;
• Implementation of supply contraction measures falling short or safety inspections loosening, resulting in increased supply;
• Weather disturbances impacting coal price expectations.

▍ Investment Strategy: Domestic coal prices have stabilized and rebounded; continue to favor coal sector performance.

The Middle East geopolitical conflict has lasted over three weeks, with international oil and gas prices showing sustained strength. Although short-term demand for thermal coal faces seasonal weakness, ongoing chemical demand may continue to support price stabilization and rebound; coking coal prices are also stable or rising amid improved short-term demand. Coupled with overseas factors, we are optimistic about the upside and sustainability of domestic coal prices and continue to favor the sector.

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