SunSirs: An In-Depth Analysis of Domestic Coal Supply and Demand Fundamentals

According to the Daily Economic News, in terms of the structure of coal demand, approximately 60% is used for power generation. As mentioned earlier, coal-to-chemicals accounts for slightly over 8% of coal consumption, although figures may vary slightly depending on the statistical methodology used. Therefore, considering various factors, even if the coal chemical industry—as discussed earlier—were to boost domestic coal demand, the actual proportion of coal demand remains at around 8% to just under 9%. Given that capacity utilization could potentially rise by as much as 20%, this proportion is not particularly excessive. Of course, there will certainly be an impact, but it is not particularly dramatic.

Consequently, the fundamentals of the coal market have been somewhat overlooked recently due to various market-moving developments. However, it is evident that the recent performance of the coal fundamentals has been quite favorable. Although we are currently in the off-season for coal consumption, coal prices have defied seasonal trends, with prices actually experiencing a counter-seasonal rise.

This year, we can observe that domestic coal supply remains relatively restrained. For instance, in the first two months of this year, domestic raw coal production stood at 763 million tons, a year-on-year decrease of 0.3%, with new production capacity additions being relatively limited. This may well be due to the impact of safety regulations introduced last year. In early April, another coal mine safety incident occurred in Shanxi, which may lead to tighter safety oversight and potentially affect production levels.

There is another very significant factor at play: from 1 April, the Daqin Railway will undergo a 30-day maintenance period. The Daqin Railway is a vital rail corridor for transporting coal from the west to the east of the country. As we know, coal distribution across the country is regional in nature, with Shanxi and Shaanxi being major coal-producing regions. However, coal must first be transported from the production sites to the ports, and the Daqin Line plays a vital role in this rail transport. Once at the ports, the coal is then shipped by sea to regions with high electricity demand, such as East China and South China. The commencement of maintenance on the Daqin Line will affect coal transport volumes and efficiency, leading to a decline in port coal inventories. In fact, we can already see very clearly that coal stocks at northern ports are declining. In this situation, on the one hand, supply is relatively constrained and production is relatively restrained; on the other hand, stocks are also falling. Therefore, whether from the perspective of imports, as we discussed earlier, or from the perspective of domestic supply, the situation so far this year has actually been relatively tight.

Let us now look at coal demand this year. In reality, coal demand this year has outperformed expectations, primarily due to stronger-than-expected demand for thermal power generation. From January to February this year, national electricity generation increased by 4.1% year-on-year, with thermal power generation rising by 3.3%. Notably, electricity consumption in the secondary sector saw a significant year-on-year increase of 6.3%. Given the impact of the 13 May 2023 renewable energy capacity additions last year, which placed considerable pressure on thermal power generation in the first half of last year, we believe the base effect pressure may ease somewhat in the second half of this year. Therefore, from a full-year perspective, demand performance so far this year has been reasonable. As we enter the summer peak electricity consumption season from May onwards, we believe that with supply remaining relatively restrained, ongoing disruptions from imported coal, and demand holding up reasonably well during the off-peak season, coal is likely to demonstrate the price elasticity one would expect once the peak season arrives.

Previous overly optimistic expectations regarding the US-Iran conflict and Indonesia’s coal production quotas have, in fact, already been priced in. Our coal fundamentals are not pessimistic; on the contrary, they have performed rather well. We therefore believe that, under these circumstances, a price correction may actually present a favorable opportunity to build positions. Looking ahead to the full year, we believe that coal’s role as a safety cushion and stabilizing anchor for our energy sector will remain unshaken.

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