SunSirs: Outlook for the Coal Chemical Industry Amid Geopolitical Turmoil

According to Sina Finance，as the opening year of the 15th Five-Year Plan, demand for thermal coal in 2026 is expected to see a modest recovery, driven by the rapid development of new infrastructure such as AI and renewable energy, efforts to stabilise economic growth, and the impact of global energy shocks and substitution. Coking coal, however, is likely to remain weak due to sluggish property market conditions and ongoing steel industry regulations;

Marginal supply adjustments driven by the ‘anti-over-competition’ trend, whilst ‘securing supply’ remains the core priority; the global coal supply-demand balance remains tight, with China’s raw coal output growth projected at 0.5%–1.5%;

Prices are expected to rebound, with 5,500 Kcal thermal coal potentially trading at 730–830 yuan per tonne, leading to a recovery in industry profits compared to 2025;

Financial leverage in the sector has eased somewhat, liquidity risks are manageable, and credit quality remains stable.

The coal chemical industry will benefit from rising product prices, with profits likely to improve significantly.

Since 2026, the US-Iran conflict has continued to escalate, with the Strait of Hormuz blocked and key energy facilities in the Middle East attacked. The global energy market has faced a new round of supply shocks, crude oil prices have risen sharply, and gaps have emerged in the chemical supply chain. Although the US and Iran have recently commenced negotiations and there are signs of easing in the geopolitical situation, it will take time for the damaged energy facilities to resume production, and the full restoration of navigation through the Strait remains uncertain; consequently, the global supply gaps in crude oil and chemical products are unlikely to be bridged in the short term. Against this backdrop, cyclical sectors are showing divergence amid rising costs and supply-demand rebalancing. While some enterprises face profit pressures and fluctuations in financial leverage, supply adjustments guided by the industry’s ‘anti-over-competition’ policies are also providing support for prices. In recent years, sectors such as steel, chemicals and coal have experienced sustained sluggishness or a downturn in business conditions; even within an issuer structure dominated by state-owned enterprises, the sector’s credit spreads remain at relatively high levels compared to other industrial enterprises. In the current environment, where yields on safe-haven assets are generally low and high-yielding quality assets are scarce, cyclical sectors continue to attract investor attention. This article analyses and forecasts the operational trends and credit quality of the coal, steel and chemical industries for 2026, examining dimensions such as supply-demand dynamics, price trends, financial pressures and liquidity.

Coal – Tight supply-demand balance, some profit recovery, stable credit quality

Demand side:

As 2026 marks the opening year of the 15th Five-Year Plan, the rapid development of new infrastructure—including AI, the digital economy and new energy—will drive electricity demand. With traditional infrastructure investment being brought forward and supported by policies to stabilise growth, domestic coal demand for thermal power generation is expected to see a modest recovery; global energy shocks will also drive an increase in demand for coal as a substitute;

however, due to the relative weakness of the property sector and capacity and output controls in the steel industry, coking coal demand will continue to perform weakly.

We anticipate that as new infrastructure projects—such as computing clusters, ultra-high-voltage power grids and new energy charging facilities—are accelerated, the driving force of high-energy-consuming emerging industries on electricity demand will become increasingly prominent. Regarding emerging electricity demand, the expansion of AI computing power and related industrial chains is becoming a key engine for growth in electricity demand. According to the China Electricity Council, electricity consumption in China’s internet and related service sectors grew by 30.7% year-on-year in 2025. Regarding traditional demand, 2026 marks the opening year of the 15th Five-Year Plan. With major projects across the country commencing construction in a concentrated manner, infrastructure investment being brought forward to a moderate extent, and policies to stabilise growth continuing to take effect, this will provide a floor for industrial electricity consumption and total social electricity consumption. As of the end of February 2026, national infrastructure investment had grown by 11.4% year-on-year, compared to a decline of 1.5% for the whole of 2025. We have observed that over the past two decades, the growth rates of total electricity consumption and thermal power generation have often shown a marked rebound or a temporary peak in the opening year of each Five-Year Plan. We believe that, supported by both the stabilisation of growth in traditional energy-consuming sectors and the continued pull from emerging industries, 2026—as the opening year of the 15th Five-Year Plan—will continue this trend, thereby driving a modest recovery in demand for thermal coal and other commodities.

At the same time, against the backdrop of volatility in the global energy market, the demand for coal as a substitute for oil and gas is also expected to rise. In an environment of high oil and gas prices, coal primarily substitutes for oil and gas through two pathways: direct substitution in power generation and heating, and conversion as a feedstock for coal chemical industries. Since late February 2026, tensions between the US and Iran have persisted; although there have been some signs of recent easing, the negotiation timeline and outcomes remain highly uncertain, and shipping risks in the Strait of Hormuz remain significant, causing notable disruptions to global liquefied natural gas (LNG) trade and oil transportation. By the end of March 2026, the price of Brent crude had risen by more than 50% compared to pre-conflict levels, whilst the JKM, the benchmark for Asian LNG spot prices, had surged by approximately 90%. Should this high gas-to-coal price ratio persist, coal-fired power generation will become a practical choice for countries and regions such as Japan, South Korea and Europe, owing to its cost-effectiveness. Furthermore, the sharp rise in international oil prices has pushed up the price benchmark for chemical products, whilst coal price increases have been significantly lower than those of oil. This will also drive up operating rates in the coal chemical industry, thereby boosting demand for industrial coal. Consequently, we believe that in an environment of high oil and gas prices, the demand for coal as a substitute for oil and gas, both domestically and internationally, is likely to strengthen further, thereby providing external support for domestic coal demand.

On the coking coal demand side, demand remained weak due to the continued weakness in the property sector and the regulation of steel production capacity and output. In 2025, the floor area of new housing starts and the floor area under construction in China fell by 20.4% and 10.0% year-on-year respectively, with steel demand from the property sector still in a period of adjustment. Regarding crude steel output, China’s production is projected to fall by 4.4% year-on-year to 961 million tonnes in 2025, marking the first time since 2020 that output has fallen below 1 billion tonnes. We anticipate that, amid insufficient demand and supply-side adjustment policies such as the ‘anti-over-competition’ initiative, crude steel output will continue to be curtailed in 2026, with little prospect of a recovery in coking coal demand.

Supply side:

In 2026, marginal adjustments to coal supply resulting from industry policies such as ‘anti-overcapacity’ will be implemented, whilst ‘securing supply’ remains the core priority; China’s raw coal output growth is projected to be between 0.5% and 1.5%.

Major exporting countries such as Indonesia are tightening coal export policies, leading to an overall tight supply situation for coal both globally and domestically.

We have observed that in recent years, the responsiveness of supply-side adjustments in the coal industry has been significantly higher than in other commodity sectors such as steel. On the production expansion side, following the energy shortages of 2021, the state accelerated the approval of new mines and the release of production capacity. Coupled with technological advancements that have shortened the capacity construction cycle to 1–1.5 years, raw coal output growth rates for 2021–2023 reached 4.7%, 9.0% and 2.9% respectively, gradually alleviating the tight supply situation. On the production reduction side, the effects of the “anti-overcapacity” policies have been equally significant. In July 2025, the National Energy Administration issued the ‘Notice on Organising Inspections of Coal Mine Production to Promote Stable and Orderly Coal Supply’, advancing the ‘anti-overcapacity’ campaign in the coal sector through ‘overproduction inspections’. In the second half of 2025, national raw coal output fell by 2.7% year-on-year, compared with a year-on-year growth rate of 6.1% in the first half, demonstrating a clear reduction in production.

We believe that against the backdrop of a marginal recovery in domestic coal demand and the impact of geopolitical conflicts on energy security, the “anti-overcapacity” policies in the coal sector in 2026 are likely to serve primarily as a marginal supply adjustment factor. As coal acts as the “ballast” of energy security, “ensuring supply” remains the industry’s core bottom line; we expect the annual growth rate of raw coal production to be between 0.5% and 1.5%. As a foundational energy source, coal must both underpin the development of a new energy system and fulfil its role as a safety net for energy security. In recent years, driven by the dual imperatives of ensuring energy security and supply, alongside intelligent and green transformation for high-quality development, fixed-asset investment in coal has continued to grow at a relatively rapid pace, with a compound annual growth rate of 12.6% between 2020 and 2025, providing a relatively solid foundation for energy security. Furthermore, at the end of 2025, the National Development and Reform Commission issued the ‘Notice on the Signing and Supervision of the Fulfilment of Medium- and Long-Term Contracts for the Security of Thermal Coal Supply in 2026’, renaming ‘medium- and long-term thermal coal contracts’ to ‘medium- and long-term contracts for the security of thermal coal supply’, thereby explicitly elevating these contracts to the strategic level of national energy security. We believe that, under the principle of prioritising supply security, although supply-side policies may be tightened on a phased basis, this will not undermine the foundations of stable domestic coal supply.

Major coal-exporting nations such as Indonesia are tightening their coal export policies, which may further exacerbate the global coal supply shortage. Recently, Indonesia’s Ministry of Energy and Mineral Resources (ESDM) revised its 2026 coal production target to 733 million tonnes, having previously planned to reduce the annual production quota to 600 million tonnes. Data from the Indonesian Coal Mining Association indicates that the country’s coal production in 2025 stood at 790 million tonnes, with exports of approximately 540 million tonnes, representing year-on-year declines of 5.5% and 7.9% respectively. We believe that Indonesia’s tightening of coal production and export controls, aimed at strengthening its domestic energy self-sufficiency, aligns with the current reality of intensifying global competition for energy resources. As the world’s largest thermal coal exporter, this move has, to some extent, exacerbated expectations of global coal supply tightness.

Prices and Profits:

The price benchmark is recovering, with the benchmark price for 5,500 Kcal thermal coal likely to range between 730 and 830 yuan per tonne; industry profits are expected to improve compared with 2025;

The upper limit of prices will be influenced by the duration of the conflict, but domestic supply guarantees and long-term contract mechanisms are expected to curb significant fluctuations in coal prices;

We believe that a modest recovery in demand, coupled with a tight supply-demand balance, will drive the benchmark coal price upwards. As a major producer and consumer of coal, China’s price movements are primarily driven by domestic supply and demand dynamics, though they are also influenced by the international energy landscape. These influences are transmitted through direct or indirect channels, including energy substitution and changes in imported coal prices. Historical price analysis indicates a strong positive correlation between coal prices and oil and gas prices; however, the correlation between coal and oil/gas prices fluctuates depending on the specific phase and external drivers. For instance, in earlier stages, when LNG applications were limited and the substitution mechanism between coal and oil/gas was not yet mature, the correlation was not particularly high; however, during periods of global energy tightness—such as the Russia-Ukraine conflict and the post-pandemic demand rebound—the substitution effect reached its maximum extent, and the domestic coal market became significantly more closely linked to international markets. Subsequently, as domestic ‘supply security and price stability’ policies took effect, the transmission of international price fluctuations to domestic coal prices weakened, and the independence of China’s market strengthened. We believe that the US-Iran conflict will have a supportive effect on domestic coal prices; should the conflict persist, it may further push up price ceilings. However, domestic coal supply safeguards and long-term contract mechanisms will reduce the likelihood of significant price volatility. A recovery in coal prices will drive an upturn in industry profits in 2026; nevertheless, based on our baseline price assumptions, profit levels will remain below those of 2024.

Financial Condition and Credit Quality:

In 2026, the industry’s financial leverage will ease somewhat, with the EBITDA of the vast majority of sample companies sufficient to cover interest payments;

Liquidity risks are manageable, and the industry’s credit quality remains stable.

We expect that, as industry profits recover in 2026, the median adjusted debt-to-EBITDA ratio of the sample coal enterprises will decline. Although it will remain at a relatively high level, the EBITDA of the vast majority of companies will be sufficient to cover interest expenses. We observe that, due to factors such as sustained high levels of capital expenditure within the sector, most coal enterprises in the sample expanded their debt levels during the previous economic cycle; even as industry conditions deteriorated markedly in 2025, debt levels continued to accumulate. Although coal enterprises have retained a certain amount of cash on hand in recent years, the continued expansion of debt has made their financial leverage more sensitive to cyclical fluctuations. Overall, the coal industry generally bears a heavy debt burden, with financial leverage levels higher than those of most industrial enterprises. Following a business cycle, the financial leverage of the sample coal enterprises—measured by adjusted total debt to EBITDA—declined markedly between 2021 and 2023; however, this was primarily due to an improvement in EBITDA, whilst the actual scale of debt continued to expand. However, with the decline in coal prices, the leverage levels of the sample coal enterprises have risen significantly in 2024–2025. We believe that the recovery in industry profits in 2026, the reduction in financial leverage, and the cash reserves accumulated in recent years will keep liquidity risks under control for most coal enterprises; however, should coal prices fall more than expected or the financing environment tighten, the credit quality of some enterprises with heavy debt burdens and weak profitability may once again become fragile.

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