According to a research report by CITIC SEC, the ongoing geopolitical conflict in the Middle East, now extending beyond three weeks, has led to sustained increases in international oil and natural gas prices. Although thermal coal demand is currently facing a seasonal slowdown, demand for coal used in chemical production is expected to continue rising, helping to reverse the recent decline in coal prices. Coking coal prices are also showing signs of stability with a potential upward trend, supported by short-term demand improvements. With additional support from overseas factors, CITIC SEC remains optimistic about the upward momentum and sustainability of domestic coal prices and maintains a positive view on the sector's performance. The firm recommends companies engaged in coal chemical operations, those with relatively favorable valuations, and firms with overseas coal resource exposure. Key points from the report include: Overseas energy price increases have demonstrated strong persistence, which is expected to improve domestic coal price expectations steadily. While domestic coal prices have underperformed relative to expectations since the onset of the Middle East conflict, international oil and gas prices have continued to climb, outperforming levels seen during the same period of the Russia-Ukraine conflict. The bank suggests that the impact of the Middle East conflict on global coal supply reductions will be gradual, and sustained high oil and gas prices may increase consumption of high-calorific-value coal globally, raising benchmark coal prices in the Asia-Pacific region and supporting ongoing improvements in domestic coal price expectations. Domestic coal prices may exit their recent period of weak volatility and enter a phase of steady growth. Following the outbreak of the Middle East conflict, domestic coal prices did not mirror the sharp increases seen in overseas energy markets, instead showing subdued fluctuations, partly due to the gradual onset of the low season for power generation coal demand. However, the bank identifies three short-term factors that could help thermal coal prices transition into a steady upward trend: 1) Improved profitability in the chemical sector may drive higher coal consumption, supporting price increases; 2) Industry data for the first two months of the year showed year-on-year improvements, suggesting full-year fundamentals may exceed expectations; 3) Overseas coal prices continue to trade at a premium amid prolonged conflict. Meanwhile, coking coal prices are expected to remain stable with potential upside, supported by inventory replenishment along the supply chain and improved profitability in coking operations. Over the past three weeks, the coal sector has shown expanding excess returns, with the thermal coal sub-sector delivering the strongest performance. Since the start of the Middle East conflict, the sector's cumulative excess returns have risen steadily, increasing from 6.39% in the first week to 15.79% after three weeks. Thermal coal companies, which are most directly influenced by the rise in overseas oil and gas prices and often have coal chemical operations, have posted the best absolute returns. Looking ahead, the bank expects thermal coal stocks to maintain steady positive performance amid broad-based domestic coal price increases, while the coking coal sub-sector holds greater potential for gains. Risk factors include: easing geopolitical tensions, lower-than-expected overseas coal production cuts leading to systemic declines in international coal prices; macroeconomic fluctuations affecting coal demand and prices; weaker-than-expected implementation of supply reductions or relaxed safety inspections increasing supply; and weather-related disruptions influencing coal price expectations.
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