China Pulse Check: Coal Sector

Transcription

1 Equity Research Sector Watch Jan 4, 218 China Pulse Check: Coal Sector Sector to see tight supply-demand balance in Jan; watch implementation of coal inventory limits and coal consumption at power plants Alex Fan, CFA SFC CE No. ADJ * With contribution from the GF A-share research team. GF Securities (Hong Kong) Brokerage Limited 29-3/F, Li Po Chun Chambers 189 Des Voeux Road Central Hong Kong Sector view: Thermal coal prices to continue rising, coking coal to go up further; valuations remain low Thermal coal port prices have maintained a moderately rising trend, while mining area prices have also rebounded, reflecting demand growth during the peak season. Coking coal prices across various regions have grown steadily. Looking ahead, as thermal coal inventory is relatively low and there should be strong restocking demand prior to the CNY, we expect thermal coal prices to remain high. Although the cumulative increase in downstream coke prices has been quite high, we expect coking coal prices to go up further on tightening supply. We maintain the view presented in our 218 sector outlook report, which is that in the mid/long-term, both the domestic and overseas coal markets should stay in a supplydemand equilibrium, and that the coal sector is likely to continue to improve thanks to a declining debt-to-asset ratio and the removal of historically accumulated financial burden, as well as higher industry concentration and coal prices brought by SOE reform and supply-side reform. In the short run, the recent coking coal supply-demand has been much better than expected; the industry is set to benefit from contracting supply and rebounding restocking demand prior to the CNY, while demand is likely to strengthen further after March. Although overall coal prices might not be particularly sensitive to changes in sector fundamentals, earnings and valuation growth brought by stronger-than-expected shortterm demand are worth watching. We remain positive on industry leaders with low valuations such as Shaanxi Coal Industry (61225 CH), Yanzhou Coal Mining (6188 CH), Lu'an Environmental Energy Development (61699 CH) and Shanxi Xishan Coal & Electricity Power (983 CH), as well as Blue Flame (968 CH) given long-term benefits from coal bed methane industry growth Coal sector underperformed in Dec Although thermal coal prices have maintained steady growth, the coal sector share price index declined.8% in Dec, underperforming the SHCOMP/CSI 3 by.5pp/1.4pp, due to pressure from environmental protection and energy consumption restructuring. What to watch in Jan: Implementation of coal inventory limits and power plants coal consumption For thermal coal, as the use of coal-fired heating recovers across several regions and the impact of the CNY factor is relatively small, thermal power demand is likely to remain stable. Based on historical data, due to the CNY factor, thermal power generation in Jan typically decreases by 6.1% MoM on average; for the years when the CNY does not fall in Jan, thermal power generation for the month typically decreases by 1.9% MoM on average. As the 218 CNY falls in Feb, we expect thermal power demand to remain stable. For coking coal, as environmental pressure eases, downstream demand (especially that of low-sulfur coal) should edge up slightly. What to watch in Jan: Production remains restricted, coal imports still low As the majority of companies focus on ensuring production safety with the CNY approaching, an increasing number of mines are undergoing production suspension and overhaul; additionally, the shortage of rail transport capacity has also exacerbated the tight supply of port coal: we expect overall coal supply to be relatively tight in Jan. Coal imports fell 18.2% YoY in Nov. While restrictions on the customs clearance of coal imports might be relaxed before 15 Feb 218, weighing on domestic coal prices, we expect overall coal imports to remain low in Jan given rapidly rising overseas coal prices. (Continued on next page ) This is a summary of a report originally written in Chinese. Please contact us for more information of the original report. The Chinese version shall prevail in the event of any discrepancy between the two versions.

2 Jan 4, 218 Dec review: Mixed changes in coal prices For port coal, on 29 Dec 217, the FOB price of 5,5kcal/kg thermal coal at Qinhuangdao port was Rmb72/tonne, up 2.9% from the end of the previous month. The warehouse price of coking coal at Jingtang port was Rmb1,6/tonne, down.6% from the previous month. In mining areas, the changes in thermal coal and anthracite were mixed, while coking coal prices picked up MoM. Jan outlook: Thermal coal prices to remain high A peak season effect has been seen recently. Daily coal consumption in Dec at the top six power plants increased 18% compared to the previous month, while overall coal supply was also relatively tight. Although restrictions on the customs clearance of imported coal might be relaxed, given high daily consumption and low inventory at power plants together with the enforcement of coal inventory limits starting from 1 Jan 218, we expect power plants to start coal restocking in the near future, which means thermal coal prices are likely to remain high. Jan outlook: Coking coal prices to continue rising Coking coal prices have risen strongly recently, and coking companies earnings have continued to improve; furthermore, with reduced pressure from environmental protection, production activities at coking companies have increased significantly. On the supply side, coal mines are focusing on ensuring production safety as CNY is approaching, causing coking coal supply to tighten. The current inventory levels at steel mills and coking companies are still low. In addition, the prices of Australian coking coal have risen sharply since Nov. Overall, we expect domestic coking coal prices to continue rising. Jan outlook: Anthracite prices to go up slightly Anthracite demand for both chemical and civilian use has been strong recently. We expect prices to go up slightly. Risks: Macro-economy growth being lower than expected, demand side flopping down below expectations, supply-side reform falling short of expectations, various types of coal prices dropping down lower than expected. 2

3 Jan 4, 218 Key data point snapshots Figure 1: QHD port 5,5kcal/kg FOB price at Rmb72/tonne as on Dec 29, up 2.9% from end-nov (Rmb/tonne) Figure 2: Regional coking coal prices (Rmb/tonne) Henan Pingdingshan Anhui Huaibei 河南平顶山主焦煤 coking coal 安徽淮北焦精煤 refined coking coal 贵州水城焦精煤 Guizhou Shuicheng (G86) 四川攀枝花焦精煤 Sichuan Panzhihua refined coking coal refined coking coal Figure 3: Mixed changes in anthracite prices in Dec (Rmb/tonne) 晋城无烟中块 Jincheng anthracite 河南永城无烟中块 Henan Yongcheng lump anthracite lump 阳泉无烟中块 Yangquan anthracite 贵州遵义无烟中块 Guizhou Zunyi 18 lump anthracite lump Figure 4: As of Dec 28, RB index down 9.3% MoM, ARA and NEWC up 6.9% and 8.3% MoM RB DES ARA NewCastle

4 Jan 4, 218 Figure 5: FOB price of premium hard coking coal at Hay Point Port was US$263/tonne as of Dec 28 (US$/tonne) Hay 风景港 Point FOB Port FOB Australia-Japan LT 日澳长协价 contracts Figure 6: Price advantage of imported coal widened in Dec 进口煤优势 Price advantage of imported coal Figure 7: 11M17 China thermal power generation was 4,172.8bn kwh (1m kwh) 当月值 Monthly 当月同比 Monthly YoY 累计同比 Cumulative YoY

5 Jan 4, 218 Figure 8: 11M17 China crude steel output was 765m tonnes, up 5.7% YoY (1k tonnes) 当月值 Monthly 当月同比 Monthly YoY 累计同比 Cumulative YoY Figure 9: 11M17 China cement output was 2.155bn tonnes, down.2% YoY (1k tonnes) 当月值 Monthly 当月同比 Monthly YoY 累计同比 Cumulative YoY Figure 1: Coal inventory at key power plants was 72.57m tonnes as of Dec 1, decreased by 5.65m tonnes compared to end-nov (1k tonnes) 库存 Inventory 库存可用天数 Inventory days

6 Jan 4, 218 What else is in the GFS China Pulse Check? * The GFS China Pulse Check series offers speedy updates on industry data and exclusive insights into both short-term and longer-term trends. Its expanding coverage currently includes the following monthly issues. Steel sector update: Supply and demand analysis, raw material prices, steel and iron ore prices, outlook on the coming month. Steel trade data update: Steel product exports, iron ore imports, steel product profitability, outlook on the coming month. Crude steel output update: Monthly and daily crude steel/pig iron output, outlook on the coming month. Coal sector update: Thermal coal, coking coal and anthracite prices; supply and demand analysis; outlook on the coming month. Property sector update: Policy review, property transactions, land supply and sales, liquidity supply for developers and home buyers. Auto sector update: Auto total sales and breakdown, raw material costs. Natural gas market update: Gas consumption and output, LNG prices. Building materials sector update: Cement/glass output and prices, downstream industry (property and infrastructure) sales and investment growth. 6

7 Jan 4, 218 Rating definitions Benchmark: Hong Kong Hang Seng Index Time horizon: 12 months Company ratings Buy Stock expected to outperform benchmark by more than 15% Accumulate Stock expected to outperform benchmark by more than 5% but not more than 15% Hold Expected stock relative performance ranges between -5% and 5% Underperform Stock expected to underperform benchmark by more than 5% Sector ratings Positive Sector expected to outperform benchmark by more than 1% Neutral Expected sector relative performance ranges between -1% and 1% Cautious Sector expected to underperform benchmark by more than 1% Analyst Certification The research analyst(s) primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the company or relevant securities that the analyst(s) covered in this report: (1) all of the views expressed accurately reflect his or her personal views on the company or relevant securities mentioned herein; and (2) no part of his or her remuneration was, is, or will be, directly or indirectly, in connection with his or her specific recommendations or views expressed in this research report. 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