Overseas oil and gas prices have demonstrated strong sustainability amid the ongoing Middle East conflict, which has lasted over three weeks. Although domestic and international coal prices have underperformed, we believe that as the conflict persists and energy price transmission takes effect, domestic coal prices are likely to gradually enter an upward trajectory with sustainable gains. We maintain a positive outlook on the sector and recommend companies with coal chemical operations, those with relatively favorable valuations, and firms with overseas coal resource exposure.
Overseas energy price increases have shown strong persistence, which is expected to drive continuous improvement in domestic coal price expectations. Since the onset of the Middle East conflict three weeks ago, domestic coal prices have underperformed expectations, while international oil and gas prices have continued to rise, outperforming levels seen during the same period of the Russia-Ukraine conflict. We believe the impact of the current Middle East conflict on global coal supply constraints will be transmitted to prices gradually. Sustained high oil and gas prices are likely to increase global demand for high-calorific coal, raising the price benchmark in the Asia-Pacific region and supporting continued improvement in domestic coal price expectations.
Domestic coal prices may exit short-term weak fluctuations and enter a steady upward trend. Following the outbreak of the Middle East conflict, domestic coal prices did not follow the sharp rise in overseas energy prices but instead fluctuated weakly, partly due to the gradual entry into the off-season for domestic power coal consumption. However, we believe three short-term factors will support thermal coal prices entering a steady uptrend: 1) improved profitability in the chemical sector may drive higher coal consumption, boosting coal prices; 2) year-to-date industry data for the first two months show year-on-year improvement, with full-year fundamentals potentially better than expected; and 3) sustained overseas coal price premiums amid the ongoing conflict. Meanwhile, coking coal prices are also expected to stabilize with an upward bias, supported by inventory replenishment in the supply chain and improved profitability in coking operations.
Over the past three weeks, the sector's excess returns have continued to expand, with the thermal coal sub-sector performing the best. The coal sector has delivered significant excess returns amid the Middle East conflict, with cumulative excess returns rising week by week from 6.39% in the first week to 15.79% after three weeks. The thermal coal sub-sector showed the best absolute returns, primarily because the logic of rising overseas oil and gas prices most directly impacts thermal coal, and leading thermal coal companies also have coal chemical operations. Looking ahead, we expect the thermal coal sub-sector to maintain steady and positive performance against the backdrop of broad-based domestic coal price increases, while the coking coal sub-sector holds greater upside potential.
Risk factors include: easing geopolitical tensions, 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; weaker-than-expected implementation of supply constraints or relaxed safety inspections leading to increased supply; and weather-related disruptions impacting coal price expectations.
Investment strategy: Domestic coal prices are bottoming out and rebounding; we remain optimistic about the coal sector's performance. The Middle East conflict has persisted for over three weeks, with international oil and gas prices showing strong sustainability. Although thermal coal demand faces short-term seasonal weakness, coal consumption from the chemical sector may continue to increase, driving coal prices to rebound from recent lows. Coking coal prices are also expected to stabilize with an upward bias amid improved short-term demand. Supported by overseas factors, we are optimistic about the upside potential and sustainability of domestic coal price increases and maintain a positive view on the sector's performance.
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