Pessimistic expectations have been largely reflected in the market, with safety supervision impacts persisting. As the rainy season ends, demand is anticipated to be stronger than typical peak seasons. The firm anticipates a rebound starting in mid-July, with subsequent upward momentum driven by fundamental coal prices and corporate earnings.

The firm is optimistic about the spread of global power shortages during the summer peak demand period and expects the "power" sector to partially take over the market momentum from "solar." Recent observations indicate power shortages have already emerged in European countries like the UK and Germany, even in early summer, suggesting this year's global summer power demand shock will be significant and severe. The firm reiterates its strategic bullish view on the summer power shortage scenario and coal prices.

Key Points from Guotai Haitong Securities Co., Ltd. are as follows:

Pessimistic Expectations Already Largely Priced In

The sector has been correcting for nearly a month since June, essentially falling back to pre-rally levels seen at the start of the year. The firm believes this fully reflects market pessimism, encompassing factors such as accelerated coal mine resumption post-accidents, a significant drop in oil prices back to pre-conflict levels following a comprehensive easing of U.S.-Iran tensions, a notable decline in daily coal consumption due to nationwide heavy rainfall leading to sustained inventory accumulation at power plants and ports, potential renegotiation of Indonesia's export quotas by late July, and "production increase for supply guarantee" policies in some provinces.

Looking ahead, downside risks are largely priced in. The firm contends that current pessimistic expectations for the coal sector have been adequately reflected.

Safety Supervision Impact Continues; Post-Rainy Season Demand May Surpass Peak Season Norms; Rebound Expected Mid-July

Following the Shanxi coal mine safety incident, May production data indicates a significant impact from heightened industry safety supervision on national output. However, the market currently holds an optimistic view regarding the supply compression expected from the Shanxi incident. In contrast, the firm believes the supply impact from this safety supervision campaign has only just begun and may even persist until year-end.

The firm attributes the market's current insensitivity to supply contraction from safety checks primarily to weak demand, mainly caused by nationwide heavy rainfall leading to lower temperatures and increased hydropower output due to good water inflows, resulting in significantly higher port and power plant inventories. Observations from the first week of July indicate a marked improvement in nationwide temperatures. With East China exiting the rainy season entirely by mid-July, the country will formally enter full summer. This year's summer power demand peak is delayed but not absent.

Concurrently, the El Niño phenomenon has begun forming and is expected to exert influence for at least a quarter starting late this month. Europe is already experiencing an early wave of extreme heat, making subsequent thermal coal demand highly anticipated. An inflection point in fundamentals is imminent.

Subsequent Upside Momentum to Stem from Fundamental Coal Prices and Earnings

The firm believes the primary driver for future stock price appreciation will be fundamentals. As the nation fully enters summer, robust demand is expected to push coal prices significantly higher. Furthermore, based on Q2 earnings previews for the coal sector, benefiting from the substantial coal price increase since late April, corporate profits in Q2 have broadly recovered to the historically high levels of 2024, with the sector's average profit growth rate exceeding 50% year-on-year.

With the Q3 average coal price expected to rise further, coal company earnings are poised for additional growth. The firm views the current sector correction as potentially the best opportunity before the peak season. Fundamentals are expected to improve starting in July, followed by a catalyst from interim report pre-announcements in late July. Subsequently, upside risks are deemed significantly greater than the already fully priced-in downside risks.

Risk factors include macroeconomic growth falling short of expectations, large-scale influx of imported coal, and supply exceeding expectations.