Financial Services Association, January 8 (Reporter Zhang Liangde) When the market declined, capital seemed to favor defensive stocks. Recently, large amounts of capital were adjusted and increased positions of coking coal listed companies with high dividend rates. The stock prices of some listed coal companies reached record highs.

Some organizations believe that the coal sector has high performance, high cash, and high dividends, compounded by the industry's high prosperity and long-term cycle characteristics, and the current valuation level is low.

A CIFA reporter communicated with people and analysts in the coal industry in Shanxi and learned that the overall price of coking coal is expected to remain in a high fluctuation range this year, but it may gradually decline slightly. The profitability of the relevant coal companies is not as high as in the past two years.

There are also people from listed coking coal companies that believe that coal prices may drop slightly this year, but in the long run, compared with ordinary thermal coal, the value of scarce types of coal such as coking coal and anthracite may receive more and more attention from the market, and the value center may rise in the future.

Coking coal company's stock price reached a record high

Under the macro environment and expectations of interest rate cuts from the Federal Reserve, institutional capital has recently turned to seeking high-dividend resources and large cycle industry stocks to be both defensive and aggressive at the same time. Some coking coal-related stocks have risen markedly.

Among them, stock prices such as Huaibei Mining (600985.SH) and Lu'an Huanneng (601699.SH) have all recently hit record highs. The stock prices of coal companies such as Jizhong Energy (000937.SZ), Hengyuan Coal and Electricity (600971.SH), and Pingmei Co., Ltd. (601666.SH) are also close to historical highs.

Listed companies' stock prices rose, but the coal price trend declined. In the first quarter of this year, the price of various types of metallurgical coal dropped significantly from the 2022 high point. Among them, the price of main coking coal fell by more than 1,500 yuan/ton, while the profitability of coal companies also declined in the same quarter compared to the same period last year. The price of coking coal in the first quarter was about 200 yuan/ton lower than in the same period last year.

Looking at the whole year, some industry insiders expect that prices may not rise sharply in the next few quarters of this year. Manager Zhang, a coking coal trader in the Jiexiu region of Shanxi, said that due to the impact of the first quarter and production safety on coal mine production capacity, the supply and demand situation in the first quarter is expected to be the best of the year. Since then, downstream terminal prices and market demand may change, and prices may fall.

Zhan Guiqing, an analyst at the Shanghai Steel Union Coal and Coking Division, told CFA reporters: “The supply and demand are expected to be relatively small throughout the year. Overall supply will tend to be relaxed, but the supply side of coking coal will not increase significantly. The basic supply and demand will be relatively stable. Prices will not fluctuate much next year. It is possible (in) local rules that the pace will clearly change in frequency, supply is slightly relaxed, and demand is stable, moderate and positive. Prices may operate weakly steadily.”

Some listed coal companies have similar opinions, but their price expectations for main coking coal are slightly better. Some people in coking coal in Shanxi expect that the price of coking coal may maintain the current price throughout the year. Among them, due to the scarcity of high-quality coal types such as main coking coal, there may still be room for price increases in the future, and the price of some coking coal may diverge compared to main coking coal, but all expectations still need to be adjusted in due course according to the supply and demand structure.

Zhu Shaonan, an industry analyst at Dongwu Futures, said, “As an industry with high dividends, coking coal companies are better defensive strategies, but it is more difficult to expect higher excess returns. Judging from coal price expectations, coal mine profits in 2024 may be slightly weaker than in 2023.”

Long-term interest rate cuts have little impact, supply and demand are still the main factors affecting fluctuations

Currently, one of the main factors affecting commodity prices is the expectation that the Federal Reserve will cut interest rates. Most domestic and foreign investment institutions expect that the Federal Reserve may start a cycle of interest rate cuts this year, thereby raising bulk prices.

However, compared with bulk products such as non-ferrous metals and chemicals, the price trend of coking coal may not have much to do with interest rate cuts, and more attention is paid to the supply and demand situation. Zhan Guiqing said that judging from the Federal Reserve's previous interest rate cut cycle, which began in mid-2019, the federal funds rate fell from 2.45% to 0.05%, and the Mysteel low sulphur main coking coal price index fell from 1,580 yuan/ton to 1,280 yuan/ton during the same period. Therefore, there is no very direct causal relationship between the Fed's interest rate cut and the rise in coking coal prices. Although it is not ruled out that the loose liquidity environment triggered by long-term interest rate cuts will stimulate demand recovery, it remains to be seen whether interest rate cuts are a long-term act and whether demand for coking coal is smoothly transmitted.

Research institutes and industry companies all said that market supply and demand are still the main factors in coking coal price fluctuations. In the long run, the main factors affecting the supply and demand of coking coal are changes in the production and import volume of upstream coal mines and changes in the output of downstream steel mills. In addition, there are also changes in the energy structure and alternative use of coal types.

Judging from upstream supply and demand, it is difficult to increase domestic supply. The aforementioned coking coal source from Shanxi said that the situation of overproduction in coal mines in the past two years has disappeared, and at the same time, due to the scarcity of high-quality coal resources such as coking coal in the country, there is limited room for growth in coking coal production capacity.

However, there may be an increase in imports. Zhu Shaonan told the Financial Federation reporter, “Mongolia may increase production capacity by about 10 million tons every year. At the same time, it is expected that new railway lines will be opened to traffic this year, or increase coal transportation capacity. Furthermore, Russian coal is expected to increase to a certain extent.”

On the downstream demand side, domestic iron and water production has all been around 1 billion tons in the past three years, but due to the weakening demand for real estate, the industry's expectations for continued expansion of iron and water production have declined. At the same time, due to the meager operating profits of steel companies in the past two years, calls for production restrictions have increased; at the same time, due to the stricter requirements for “green steel” by some end users, long-term process production is expected to be controlled to a certain extent. Zhan Guiqing believes that from a supply and demand perspective, “dual carbon” tasks and expectations of a slowdown in downstream demand in the next few years will bring uncertainty about the timing and intensity of the commissioning of new blast furnaces.

In the long run, demand for thermal power may decrease in the future due to the development of new energy sources.

Zhan Guiqing said that thermal power will gradually shift from an alternative energy source to a peak-shaving energy source, and demand will gradually decrease. With the current supply level unchanged, coal prices are expected to decline. Looking at the short term, on the one hand, the intermittent and volatile output characteristics of new energy sources place higher demands on the flexibility of thermal power units. There is still a potential possibility that a coal supply gap will form, and coal price volatility will rise. On the other hand, the decline in Changxie's coverage rate and the implementation of capacity electricity prices will not only underpin power generation costs, but will also make coal price performance more resilient.