Growing expectations for an El Niño event could lead to an increase in high-temperature days during summer, potentially boosting thermal coal demand in China and increasing India's demand for thermal coal, which would support global coal price expectations. We are optimistic about coal price performance in the second quarter. Even if conflicts in the Middle East ease, energy supply recovery will take time. Combined with climate factors, domestic and international coal prices may align in the mid-to-late second quarter. The effect of rising coal and chemical prices is also expected to be fully reflected in Q2. We believe new catalysts for coal price expectations are gradually forming, and the sector may enter a new phase of rebound.
Market attention on El Niño has recently increased. According to related reports, the National Climate Center predicts that El Niño conditions will begin in May this year and develop into a moderate or stronger El Niño event during the summer and autumn. Historically, during El Niño years, the number of high-temperature days in summer tends to increase in most parts of northern China and northeastern central China compared to normal years.
Reviewing the five El Niño events in China over the past 30 years, four resulted in accelerated year-on-year growth in electricity generation or thermal power demand during the summer, with 2009 being the most notable exception to 2015. In most cases, El Niño leads to higher temperatures, driving up electricity generation and consumption. If residential electricity consumption growth increases by 1 percentage point year-on-year in June-August, coal consumption growth could rise by 0.18 percentage points. If thermal power generation growth increases by 1 percentage point, coal consumption growth could correspondingly rise by 0.58 percentage points, equivalent to an additional 7.51 million tonnes of raw coal consumption. Additionally, El Niño years typically reduce rainfall in major coal-importing countries like India, leading to accelerated thermal coal imports in most years, which may also benefit coal prices in the Asia-Pacific region.
Looking at short-term fundamentals, with the peak season approaching and weather factors providing support, we remain positive on coal price trends in the second quarter. Since the beginning of the year, factors such as expected reductions in Indonesia's production quotas and Middle East conflicts have driven a gradual recovery in coal prices. Although these factors have recently shown signs of weakening, we expect the central price of coal to continue rising in Q2 for three main reasons: 1) Peak seasonal demand in domestic and international markets may align starting in late May. Additionally, structural substitution demand for high-calorific-value coal replacing natural gas in countries like Japan and South Korea could push international coal prices into a new upward trend, driving up domestic spot prices. 2) Domestic thermal power demand and coal consumption by the chemical sector have performed better than expected this year, and this trend is likely to continue. 3) El Niño weather conditions may lead to marginal improvement in summer thermal coal demand in China and increased coal demand in India, strengthening expectations for improved domestic supply-demand dynamics.
We anticipate that the average price of thermal coal in Q2 could rise above 800 yuan per tonne, and coking coal prices are also expected to increase sequentially. From a year-on-year perspective, the effect of rising coal and chemical product prices may be fully realized, with average prices showing significant improvement compared to the same period last year. Sector performance in Q2 is likely to be strong.
Risk factors include: easing geopolitical conflicts; international coal production cuts falling short of expectations, leading to systemic declines in global coal prices; macroeconomic fluctuations affecting coal demand and prices; weaker-than-expected implementation of supply reduction policies or relaxed safety inspections leading to increased supply; accelerated energy structure adjustments and intensified carbon reduction efforts increasing pressure on coal consumption; and weather-related disruptions affecting coal price expectations.
In terms of investment strategy, the sector is entering a new rebound phase. Since the Middle East conflicts began, domestic thermal coal demand has faced an off-season, but coal consumption by the chemical sector continues to be released, supporting thermal coal price increases. Coking coal prices are also expected to remain stable or rise amid supply disruptions. After significant volatility in recent weeks following Middle East developments, we believe that as the summer peak season approaches, supported by international factors and El Niño weather expectations, coal price outlook may improve again. This could align with market style rotations, driving the sector into a new rebound phase.
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