Guotai Junan: Global perspective on the impact of the US economic downturn on Chinese coal industry

According to the financial news app Zhitong Finance, Guotai Junan Securities released a research report stating that the coal industry is undergoing profound changes in supply and demand structure, gradually "public utility-ization". This also reflects the investment strategy issue where high dividend assets are increasingly favored by the market under the background of asset shortage and the downward trend of risk-free interest rates. Unlike global pricing for crude oil and natural gas, China accounts for 56% of global coal demand, with an import dependency of only around 10%, which is merely supplementary. The fluctuations in China's coal prices more reflect changes in the supply and demand structure of the country's coal industry. Therefore, it is expected that the impact of the current round of US interest rate cuts on domestic coal prices will be limited; high dividend assets remain an important long-term investment direction.

The research report recommends high-quality leading companies with stable profitability and predictable earnings in the coal industry, such as SHCI, China Shenhua; recommends Xinji Energy, which integrates coal and electricity, benefiting from Shaanxi Energy; recommends long-term coking coal companies: Hengyuan Coal Electricity, Pingmei Coal, Huaibei Mining, Shanxi Coking Coal; recommends leading state-owned enterprises in the reform of the coal industry: China Coal Energy; recommends Shanmei International at a fundamental turning point.

The report also mentions that the impact of the current round of US interest rate cuts on domestic coal prices is limited, and the fluctuations in China's coal prices more reflect changes in the domestic coal industry's supply and demand structure. With increasing downward pressure on the US economy, the market is starting to trade on the rapid entry of the US economy into a recession cycle, and there are concerns about the disruption of global economic recession on energy prices, thereby affecting China's coal industry. Guotai Junan Securities believes that global energy prices definitely influence each other, with coal prices historically more closely related to natural gas, and during previous US interest rate cut cycles, global coal prices have fallen more than risen, but the overall decline is not significant, within -15%.

Furthermore, the international coal prices have a weaker impact on China mainly because, unlike global pricing for crude oil and natural gas, especially the US being the largest variable in marginal demand elasticity; China accounts for 56% of global coal demand, with an import dependency of only around 10%, which is merely supplementary. The fluctuations in China's coal prices more reflect changes in the country's coal industry's supply and demand structure. Although it has been observed in past US interest rate cuts that China's coal imports have increased significantly, Guotai Junan Securities believes that the global coal supply background of this round of US interest rate cuts has undergone significant changes, mainly due to: rapid decline in global coal production; internal division in Asia, with China's production capacity utilization reaching its limit due to restrictions from the "Coal Mine Safety Production Regulations", increasing demand in Indonesia, certain growth in demand in India, and with the downward trend in international maritime trade volume, the rise in demand in Indonesia and India may erode China's import market.

The likelihood of a rate cut in September has significantly increased, and high dividend assets remain an important long-term investment direction. Guotai Junan Securities believes that with the weakening of US economic data, the possibility of entering a rate cut cycle in September has significantly increased. Combined with the downward trend in domestic interest rates, high dividend assets may continue to be an important investment direction for a long time in the future. Currently, the core issue regarding dividend assets lies in the reshaping of investment logic and the examination of downside risks in various industries The bottom of the coal sector is resilient, and the "dividend coal" has been reaffirmed under recent pressure tests. Since June, the coal sector has retraced by 15%, slightly higher than the retracement of the dividend index, leading to market concerns about whether the dividend logic of the coal sector has changed. Guotai Junan Securities believes that by 2024, coal has already tested the mid-term pressure of the off-season and the peak season, testing the price performance under extreme demand pressure ahead of most industries. Although the overall coal price peak is lower than expected, the bottom currently appears to be resilient. Since the impact of the supply-side reform in 2016, combined with the mid-term policy goals of "dual carbon" and the "Coal Mine Safety Production Regulations," have jointly interpreted the "supply big cycle." Even under extremely pessimistic assumptions on the demand side, coal may still be one of the most resilient sectors. "Dividend coal" can be reaffirmed.

Risk Warning: Macroeconomic growth falls short of expectations; large-scale imports of coal; supply exceeds expected release