CITIC Securities: Domestic coal prices are expected to gradually enter an upward trend, with price increases demonstrating sustainability

CITIC Securities Research Report states that this round of Middle East geopolitical conflicts has lasted over three weeks, and overseas oil and gas prices have shown good sustainability; although domestic and international coal prices are relatively weak, CITIC Securities believes that as the conflict persists and energy prices transmit, domestic coal prices are expected to gradually enter an upward trend, with price increases being sustainable. CITIC Securities remains optimistic about the sector, recommending companies with coal chemical businesses, those with relatively advantageous valuations, and also paying attention to overseas companies with coal resource layouts.

Full Text Below

Coal | Domestic fundamentals are recovering, Middle East conflict continues to catalyze

This round of Middle East geopolitical conflict has lasted over three weeks, and overseas oil and gas prices have shown good sustainability; 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 being sustainable. We continue to be optimistic about the sector, recommending companies with coal chemical businesses, those with relatively advantageous valuations, and also paying attention to overseas companies with coal resource layouts.

▍ Overseas energy prices continue to rise steadily, likely to promote 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, with overall prices outperforming those during the Russia-Ukraine conflict period. We believe that the impact of this Middle East conflict on global coal supply contraction and price transmission is gradual; 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 favorable for the continued improvement of domestic coal price expectations.

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

After the outbreak of the Middle East conflict, domestic coal prices did not follow the overseas energy prices surge but mainly oscillated weakly, which is partly related to the gradual off-peak season for coal consumption in power generation. However, we believe three short-term factors will help thermal coal prices enter a steady upward trend: 1) Improved chemical profitability may boost chemical coal demand, driving coal prices up; 2) Industry data for the first two months show year-over-year improvement, suggesting the fundamentals for the year may be better than expected; 3) As the conflict persists, overseas coal prices continue to maintain a premium. Meanwhile, coking coal prices are also expected to remain stable with an upward bias, supported by inventory replenishment in the industry chain and improved coking profitability.

▍ 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, with cumulative excess returns increasing weekly from 6.39% in the first week to 15.79% after three weeks. The thermal coal sub-sector showed the best absolute performance, mainly because the impact of overseas oil and gas price increases on thermal coal is most direct, and leading thermal coal companies all have coal chemical businesses. Looking ahead to short-term trends, we expect that under the backdrop of a comprehensive domestic coal price increase, the thermal coal sector will maintain steady and positive performance, while the coking coal sub-sector has greater upside potential.

▍ Risks:

Geopolitical conflict easing, overseas coal production reduction falling short of expectations, leading to systemic declines in international coal prices; macroeconomic growth fluctuations affecting coal demand and prices; supply contraction enforcement weaker than expected, or safety supervision easing, leading to increased supply; weather factors disrupting or affecting coal price expectations.

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

The Middle East geopolitical conflict has lasted over three weeks, and the rise in international oil and gas prices shows good sustainability. Currently, although short-term demand for thermal coal faces seasonal decline, chemical coal demand may continue to release, supporting a rebound in coal prices; short-term demand improvement also supports stable or rising coking coal prices. Coupled with overseas factors, we are optimistic about the space and sustainability of domestic coal price increases and continue to favor sector performance.

(Source: People’s Financial News)