China Merchants Securities Co.,Ltd. has released a research report maintaining its "Recommended" investment rating for the coal mining sector. The overarching view is that coal prices and coal equities follow the principle where "supply and demand determine the trend, while power plant restocking dictates the short-term rhythm."
On the supply side, a reduction is seen as highly certain. Regarding demand, the primary downstream sector for thermal coal, thermal power generation, is currently showing a marginally weakening trend, with power plant inventories at elevated levels, leading to a short-term decline in coal prices. Looking ahead, the bank believes the core determinant of the direction for coal prices and equities during the peak season will be whether power plant inventories can be rapidly drawn down.
The primary views of China Merchants Securities Co.,Ltd. are outlined below:
Review of Past Dynamics
Reviewing the major shifts in market dynamics during the first half of the year, the bank notes that, overall, coal prices and stocks adhered to the pattern of "supply and demand setting the direction, with power plant restocking influencing the short-term pace." Both meso-level industry supply-demand imbalances and micro-level entity behavior are deemed equally significant. In early February, Indonesia's reduction of its RKAB coal quota coincided with the Chinese New Year holiday in domestic production hubs, limiting the ability to respond to the overseas supply decline. In mid-March, amid the Middle East conflict and the coal-for-gas substitution logic, rising electricity prices under marginal gas-fired pricing expanded the upside for coal prices while also increasing daily consumption for thermal power. The power plant restocking logic that began around April 20th was more classic, bearing similarities to the pre-2025 heating season restocking that drove coal prices higher, serving as a typical case study for accurately judging coal price momentum by observing micro-level entity behavior.
Current Market Assessment
Returning to supply and demand and continuing with the "supply-demand direction, restocking rhythm" framework, the bank analyzes current meso and micro characteristics. On the import front, it is believed that with Indonesia's RKAB quota reduction, a significant decrease in China's imports of Indonesian thermal coal is highly certain. Concurrently, attention should remain on potential marginal changes to Indonesia's DSI policy in the second half of the year. In the medium to long term, the Indonesian government's control over coal resources has notably strengthened. Indonesian coal's previous advantages over Australian coal—higher spot market share and more flexible production capacity—are diminishing. Combined with Indonesia's RKAB quota management system, a clear trend of production capacity concentration among leading players is evident. Domestically, supply reductions are highly certain due to the impact of the Shanxi Qinyuan mining accident on major production areas. Port inventories have also begun to decline, influenced by narrowing profit margins for shipments.
On the demand side, the primary downstream sector for thermal coal, thermal power, is currently showing a marginally weakening trend, with power plant inventories at elevated levels, driving a short-term retreat in coal prices.
Outlook and Scenarios
The bank provides a discussion and outlook for future coal prices under different scenarios. It posits that the core direction for peak season coal prices and equities hinges on whether power plant inventories can be rapidly depleted. In an optimistic scenario, if after entering July rainfall ceases and temperatures rise rapidly, leading to a swift and sustained increase in power plant daily consumption for about two weeks, the bank believes power plant inventories could be effectively drawn down. This could reduce available inventory days to relatively low levels, potentially prompting a renewed uptick in coal prices.
In a pessimistic scenario, if summer heat falls short of expectations and power plant available inventory days do not show effective decline, coal prices may fluctuate and trend downward.
Investment Recommendations
1) Under the optimistic scenario, attention is advised on companies with high exposure to thermal coal spot markets and significant earnings sensitivity, such as Haohua Energy, Jinkong Coal Industry, and Yankuang Energy.
2) Under the pessimistic scenario, the recommendation is for stable state-owned enterprises previously constrained by market style factors. These companies typically have a high proportion of long-term contracts, extensive layouts across the industrial chain, and strong earnings stability, including China Shenhua Energy and Shaanxi Coal Industry.
Risk Factors
Potential risks include coal production falling short of expectations, coal imports exceeding expectations, coal price declines exceeding expectations, and coal demand falling short of expectations.
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