CITIC SEC: Domestic coal prices have stopped falling and rebounded, and we continue to be optimistic about the performance of the coal sector.

CITIC SEC released a research report stating that the Middle East geopolitical conflict has lasted for over three weeks, and the rise in international oil and gas prices shows good sustainability. Currently, although thermal coal demand is facing a slow season in the short term, the demand from the chemical industry for coal may continue to be released, driving coal prices to stop falling and rebound; under the improvement of short-term demand, coking coal prices are also stable with a bullish outlook. Combined with overseas factors, it is optimistic about the upward space and sustainability of domestic coal prices, and continues to be optimistic about the performance of the sector. It recommends companies with coal chemical business, companies with relatively advantageous valuations, and also pays attention to companies with coal resource layouts overseas. The main points of CITIC SEC are as follows: The sustainability of the rise in overseas energy prices is good, which is expected to drive continuous improvement in domestic coal price expectations. Since the outbreak of the Middle East conflict three weeks ago, although domestic coal prices have performed lower than expected, the continuous rise in oil and gas prices in overseas markets has shown better overall performance compared to the period of the Russia-Ukraine conflict. The bank believes that the impact of this round of Middle East conflicts on global coal supply shrinkage gradually transmits to prices, and high oil and gas prices are expected to drive an increase in global high-calorie coal consumption, pushing up coal price centers in the Asia-Pacific region, benefiting the continuous improvement in domestic coal price expectations. Domestic coal prices may end the short-term weak and volatile situation and enter a steady upward trend. After the outbreak of the Middle East conflict, domestic coal prices did not follow the sharp rise in overseas energy prices, but mainly showed weak and volatile movements, which is somewhat related to the gradual entry of domestic power coal consumption into the slow season. However, the bank believes that three major factors in the short term will help drive thermal coal prices into a steady upward trend: 1) improved profits in the chemical industry may increase the demand for chemical coal, driving up coal prices; 2) industry data for the first two months of the year in China has shown improvement year-on-year, and the overall fundamentals for the year may be better than expected; 3) with the continued conflict, overseas coal prices continue to maintain a premium. At the same time, under the expectation of industry chain replenishment and improved profits in coking, coking coal prices are also expected to remain stable with a bullish outlook. The sector's excess returns have continued to expand over the past three weeks, with thermal coal sub-sectors performing the best. Under this round of Middle East conflict, the coal sector's excess returns have been significant, with accumulated excess returns climbing weekly after the conflict started, from 6.39% in the first week to 15.79% after three weeks. Among them, the absolute performance of the thermal coal sub-sector is the best, mainly because the logic of rising oil and gas prices overseas has the most direct impact on thermal coal, and leading thermal coal companies all have a coal chemical business attribute. Looking ahead to the short-term market, the bank expects that against the background of a comprehensive increase in domestic coal prices, the thermal coal sector is expected to maintain a steady and positive performance, while the coking coal sub-sector has even greater upside potential. Risk factors: Geopolitical tensions ease, overseas coal production reductions are less than expected, leading to a systemic decline in international coal prices; fluctuations in macroeconomic growth rates affect coal demand and prices; supply shrinkage enforcement is less than expected, or safety supervision efforts are relaxed, leading to an increase in supply; weather disturbances disrupt or affect coal price expectations.