Global coal supply and demand are tight, and the intraday price of the Coal ETF (515220) has hit a new high again!

Driven by news of persistently high thermal coal demand, the coal sector in China’s A-share market strengthened once more. The Coal ETF (515220) surged over 4%, with a trading volume surpassing 370 million yuan, and its intraday price hit another new high. In a recent report, the International Energy Agency (IEA) warned that global coal demand will return to historical highs this year, while Europe's coal consumption may grow by 7% this year following a 14% jump last year.

Expectations of weak hydropower have intensified, dispelling concerns about off-season coal price pressures, further highlighting the certainty of the coal industry. Persistent high temperatures in the Sichuan-Chongqing region have led the market to expect continued weakness in hydropower. In 2021, hydropower generation in Sichuan reached 353.14 billion kilowatt-hours, but under ongoing drought and high temperatures, current hydropower output has dropped by 40-50%. With reservoir levels depleted during the wet season, it is expected that hydropower generation will remain insufficient from August 2022 to April 2023.

Over a nine-month period, assuming a 40% decline in hydropower in Sichuan, an estimated reduction of 105.942 billion kilowatt-hours in hydropower generation would occur. Based on a coal consumption rate of 300 grams of standard coal per kilowatt-hour, this corresponds to approximately 31.78 million tons of standard coal. Converting this to raw coal using a ratio of 1:1.4 for standard coal to raw coal, this amounts to 44.5 million tons of raw coal. This represents 1.84% of the 2.42 billion tons of raw coal consumed by China's thermal power plants in 2021. In summary, it is expected that due to weak hydropower, thermal coal consumption will increase by at least 1.84% by April 2023. Combined with similar impacts on hydropower in downstream provinces such as Hubei, overall thermal coal consumption is expected to rise by more than 2%. Shenwan Hongyuan stated that despite the upcoming traditional off-season for coal consumption, the expectation of weak hydropower suggests that thermal coal procurement will not see a significant decrease.

Shenwan Hongyuan noted that stabilizing coal prices during the off-season has enhanced the earnings certainty of coal companies, coupled with their high dividend characteristics, making the coal sector more attractive for allocation. Expectations of stable coal prices have strengthened, helping coal companies maintain steady performance. Currently, the coal sector is at an absolute valuation bottom, enhancing its appeal for allocation. Against a backdrop of neutral macroeconomic expectations, the defensive nature of high dividends stands out. Coal companies have no large-scale capital expenditure plans and demonstrate a strong willingness to distribute dividends. Dividends in 2021 were substantial, with dividend yields being relatively high. According to 2021 dividend payout ratios, dividend yields ranged between 7-14%. The high dividend feature offers significant defensive advantages. It is anticipated that future dividend yields for coal stocks could fall below 5%, suggesting considerable potential for share price appreciation.

Regarding imported coal, Northeast Securities noted that Europe’s coal imports account for 10.4% of global seaborne coal trade volumes. The European ban on Russian coal essentially reduces supply by 3.3%, while the top two coal exporters—Indonesia and Australia—are already operating at full capacity, leaving limited room for additional supply. Global coal markets are experiencing tight supply and demand dynamics, which could catalyze further increases in coal prices. Domestically, coal supply is expected to remain tight in the second half of the year. Prices are projected to begin rising in August-September, followed by some corrections due to temporary oversupply. However, a significant shortfall of 31.73 million tons is anticipated in December during winter, which will likely drive another substantial price rally. Investors are encouraged to consider investment opportunities in the Coal ETF (515220).

35K Views