Coal industry: supply increases substantially and demand remains weak

Power coal prices have been volatile since July. As of August 23, the price of Qinhuangdao Power Coal (Q5500) fell by 1.36% month-on-month and increased by 1.05% week-on-week. The price has recently recovered. Shanxi and Shaanxi pithead prices fell by 2.17% and 1.16% on a monthly basis, while Inner Mongolia pithead prices remained flat on a monthly basis, and coal prices remained stable in the past week.

Coal production and supply are accelerating. In July, the output of raw coal in China was 322 million tons, up 12.2% year-on-year, while the annual output fell by 3.34%. The output of Inner Mongolia, Shanxi and Shaanxi were 88.22 million tons, 84.22 million tons and 58.818 million tons respectively, up 26.8%, 11% and 12.1% year on year. In July, 32.885 million tons of imported coal were imported, an increase of 38.84 million tons, an increase of 13.4%, including 25.14 million tons of imported power coal, an increase of 37.44 million tons, an increase of 17.5%. Demand of electric power industry is weak. In July, the electricity consumption of the whole society was 667.2 billion kWh, an increase of 2.7% compared with the same period last year, and that of the whole country was 657.3 billion kWh, an increase of 0.6% compared with the same period last year. Among them, the thermal power output is 456.2 billion kWh, down 1.6% from the same period last year. Since July, the daily consumption of the six major power plants has declined and risen year-on-year. The average daily consumption in July was 666,900 tons, down 13.86% year-on-year. As of August 23, the average daily consumption in August was 737.5 million tons, down 6.08% from the same period last year. Coal demand in chemical and cement industries is stable. In July, methanol production (national sample enterprises) increased by 0.1% and 0.8% year-on-year; urea production per day increased by 7.2% and 1.5% year-on-year; urea production per day increased by 17.2% and 0.2% year-on-year as at August 23. In July, China's cement industry output reached 210 million tons, an increase of 7.5% over the same period last year. It is expected that the demand for coal for chemical industry and cement will remain high in August.

Influenced by the sharp increase in supply side and weak demand for thermal power, the price of power coal has fallen since July, and has recently risen due to the rise in daily consumption and the control of imported coal. We believe that the demand for thermal power will improve somewhat in August, while the demand for cement and chemical industry will increase slightly. With the support of safety inspection, the decline of hydropower and coal storage in September, the price of coal will be supported. We believe that the profit of the coal industry tends to be stable, and the plate valuation is low. We recommend the Shanxi coal industry of Shenhua, China, which integrates coal and electricity, with incremental capacity.