Can the energy province return to its peak and see coal prices hit bottom and rebound

The coal market, which has been continuously declining since the beginning of this year, has recently rebounded, with significant increases in coal prices and stock prices. The economic operation data of some major energy provinces in August showed that their coal industry reversed the downward trend. Can this change bring the energy province, which has performed poorly this year, back to the peak of the previous two years?

There is a turning point in the coal market

In the past two years, the coal market has continued to rise due to demand. However, since the beginning of this year, coal prices have gradually declined. According to public data, from early January to late August this year, the prices of various types of coal products in China generally fell by 20-30%. The coal index dropped from 4000 points at the end of 2022 to 3538.19 points in late August.

In this context, the growth rate of coal industry output in some energy rich provinces has been affected. Based on the data from the first half of the year, the coal industry in Shanxi, Inner Mongolia, and Shaanxi grew slower than the entire industry. Among them, the coal mining and washing industry in Shaanxi increased by 1.5% in the first half of this year, while in the first half of 2022, the coal mining and washing industry in Shaanxi increased by 12.4% year-on-year, driving the growth of large-scale industries by 3.4 percentage points.

As one of the main pillar industries, the growth rate of the coal industry is no longer strong, which weakens its impact on the regional economy. According to data released by the Shaanxi Provincial Bureau of Statistics, the province achieved a GDP of 155.032 billion yuan in the first half of the year, a year-on-year increase of 3.7%, which is 1.6 percentage points lower than the first quarter of this year and 0.6 percentage points lower than the full year growth rate of 4.3% last year.

The economic operation analysis for the first half of the year released by the Ordos Bureau of Statistics for decision-making reference also shows that in the first half of the year, due to factors such as loose supply and demand in the coal market and downward prices, industrial enterprises above designated size produced 406.946 million tons of raw coal, a year-on-year increase of 3.3%, a decrease of 1.4 percentage points from the first quarter; The added value of the coal industry increased by 6.5% year-on-year, a decrease of 2.2 percentage points from the first quarter.

However, since late August, there has been a turning point in the downward trend of coal prices, followed by a rebound. In early September, compared to late August, most coal prices increased by 5%. Since September, the ETF of coal stocks has risen by over 12%, and the coal index rose to over 4000 points on September 13th, exceeding the level of December last year.

At this time, the peak summer season has ended, and coal demand has entered the off-season. Why has there been an upward trend in the off-season?

Lin Boqiang, Dean of the China Energy Policy Research Institute at Xiamen University, told First Financial that winter is approaching, so it is necessary to store coal for the peak winter season to increase demand. Another important reason is the rise in international oil prices, breaking through $90, driving up coal prices.

Xu Hui, Secretary of the Board of Directors of Hong Kong listed coal company Hengding Industrial, told First Financial that the rise in coal prices since August is driven by the rise in commodity prices in the international market. In addition, the domestic manufacturing industry is doing well, exports are stable, and factors such as the recent introduction of a 900000 ton limit policy in the coal industry have also to some extent affected coal prices.

Although the rebound in coal prices started in late August, economic performance data from some energy rich provinces in August showed that the growth rate of their coal industry output increased, reversing the trend of continuous narrowing of growth since the beginning of this year, showing signs of rebound. The rising coal market has also enhanced its driving effect on the local economy.

According to the Inner Mongolia government website, from January to August this year, the added value of industries above designated size in the region increased by 7.5% year-on-year. Among them, the added value of the mining industry increased by 3.7% year-on-year. By comparison, the added value of Inner Mongolia's mining industry increased by 3.5% year-on-year from January to July. This means that the increase in added value of mining in August has significantly increased.

The economic performance in August released by the Shaanxi Provincial Bureau of Statistics on September 18th showed that the growth of its energy industry accelerated in August. In August, the added value of the energy industry above designated size in the province increased by 2.7% year-on-year, an increase of 0.8 percentage points compared to the previous month. From January to August, the cumulative increase in added value of the large-scale energy industry was 1.2%; Among them, coal mining and washing industry increased by 0.7%. From January to July, the added value of Shaanxi's coal mining and washing industry remained unchanged from the previous year, indicating a rebound trend.

Has a new round of upward trend begun

In the past two years, the rise in coal prices has driven energy rich provinces to achieve relatively high growth, with their GDP growth rate overall ranking among the top in the country. However, since the beginning of this year, the decline in coal prices has also lowered the GDP growth rate of these provinces, with Shaanxi's GDP increasing by 3.7% year-on-year in the first half of the year. This growth rate is 1.6 percentage points lower than the first quarter of this year and 0.6 percentage points lower than the full year growth rate of 4.3% last year.

The 21st Executive Meeting of the Shaanxi Provincial Government held in July this year analyzed the economic situation in the first half of the year and arranged for the deployment of work in the second half of the year. The meeting proposed to vigorously promote the industrial economy, adhere to stabilizing coal, expanding oil, and increasing gas, increase support for key enterprises, promote the accelerated recovery of production capacity in key areas such as raw materials, consumer goods, and equipment manufacturing, and firmly stabilize the industrial foundation.

On September 12th, the Shaanxi Provincial Government held a video scheduling meeting on stabilizing industrial growth, analyzing the operation of the industrial economy from January to August this year, and arranging and deploying the next key work. The meeting emphasized that stabilizing growth should be a top priority, anchoring goals, overcoming difficulties and implementing them, conducting in-depth analysis to identify the root causes, implementing precise policies tailored to local conditions, maintaining composure and strengthening responsibilities, using deterministic measures to hedge against downward pressure and difficulties, and promoting the stabilization and recovery of the industrial economy.

The changes in the coal market will have a positive impact on the stable growth of Shaanxi's industry, and other energy provinces will also be affected by the coal market.

In the past two years, benefiting from strong demand and rising prices in the coal market, energy rich provinces have shown impressive economic growth. However, after experiencing a downturn this year, will there be a new round of upward trend that will drive these provinces back to their peak?

According to a research report by Guosheng Securities, overall, the pressure on safety supervision continues, the supply elasticity is limited, and alternative demand such as water and electricity on the demand side is still expected to be insufficient this year. Coupled with the expectation of economic recovery, it has not been proven. The demand for coal consumption in the whole society will also be rapidly released as the economy accelerates. Under the continuous shortage of coal in the market, the elasticity of coal prices may increase, or exceed expectations.

However, Lin Boqiang believes that the recent increase in coal prices is only a seasonal short-term fluctuation, and may continue to maintain a mild upward trend this year, until the end of winter, but there will be no further significant increases. In addition, the increase in international oil prices is mainly affected by OPEC's reduction in production, and oil prices cannot remain above $90 for a long time.

Xu Hui also stated that it is still difficult to determine the trend of the coal market. Currently, it is expected that the international market will rise steadily, but it also depends on the growth of demand in the domestic market in China. The country has introduced many policies in the fields of real estate and finance, but the short-term effects should not be so fast. In addition, it has also strengthened the supervision of coal safety production, which has a certain impact.

On September 6th, the General Office of the Communist Party of China Central Committee and the General Office of the State Council issued the "Opinions on Further Strengthening Mine Safety Production Work", which mentioned strict access to mine safety production and stopping the construction of coal and gas outburst, rockburst, and extremely complex hydrogeological types of coal mines with a production capacity of less than 900000 tons/year.

In the past few years, due to strong demand for coal and tight supply. The government has approved the resumption of work in some previously closed coal mines and opened up new coal mines for production, quickly releasing a portion of coal production capacity. From this year's situation, coal supply has grown rapidly, and the supply-demand relationship has significantly eased. After the recent coal mine safety incident, stricter regulation will affect the increase in supply.