The Zhitong Finance App learned that Guojin Securities released a research report saying that until a new type of adjustable power supply outperforms advanced coal engines in terms of safety, cleanliness, and economy, coal power can maintain a relatively stable ignition price difference. When fuel costs decline, supply and demand will support electricity prices. It is recommended to focus on thermal power companies with tight power generation assets, such as Zhejiang Energy Power (600023.SH), etc.; it is expected that in 2024, the domestic production side will contribute more to the increase in coal supply than imports. It is recommended to focus on thermal power companies with power generation assets distributed in the Midwest and fuel procurement mainly based on Kengkou coal, such as Construction Investment Energy (000600.SZ), etc.

The main views of Guojin Securities are as follows:

One question: After 20 years, newly approved coal production capacity will decline, and the increase in supply will be limited. Will coal prices still rise?

Guojin Securities believes that changes in production capacity are lagging behind changes in investment and demand, supply is still increasing rather than weak demand in the electricity industry, making it difficult to reverse the downward trend in coal prices. (1) Historical review shows that when there is a tight balance between coal supply and demand, the maximum monthly daily output for each heating season represents a bottleneck in daily production during the non-heating season of the following year. Based on the daily production of 11M23 raw coal, the maximum domestic raw coal production capacity could reach 5.04 billion tons in 2024, an increase of 530 million tons over 2022.

(2) Real estate is dragging down demand for coal in the non-electricity sector, and coal price support is weak during the off-season electricity consumption. Based on the assumption that thermal power generation increased 2.6% year on year in '24, steel and cement production decreased by 0.3% and 5.0% year on year, respectively, and chemical production increased 4.0% year on year, the total demand for commercial coal is estimated to be about 4.71 billion tons, and the coal guarantee capacity has increased markedly.

Second question: After supply-side reforms, the cyclical nature of coal weakens, and may coal prices run high for a long time?

Guojin Securities believes that the rise in electricity prices changed the zero-sum game situation in the coal power industry in the 2010s, and that behind the rise in electricity prices is a re-balancing between the “impossible triangle” of energy.

(1) Fluctuations in thermal power performance are a mapping of the cyclical nature of coal under the “planned electricity and market coal” conflict. In the era of coal-fired benchmark electricity prices linked to coal power, the overall trend of electricity price adjustments from 2011 to 2020 was downward. At the end of 2021, “Document No. 1439” was issued to relax the range of transaction price fluctuations in the coal-fired power generation market to no more than 20%, greatly improving the cost guidance capacity of thermal power companies. In 2022, the total profit of the thermal coal and thermal power industry nearly doubled compared to the 2011-2020 average.

(2) The “impossible triangle” theory of energy means that the safety, cleanliness, and economy of energy cannot be combined. From 2011 to 2020, while maintaining energy efficiency, we are pursuing improvements in cleanliness. As can be seen from the “impossible triangle,” the safety of the energy system will inevitably decline during this period, which was eventually revealed during the two power shortages in 2021 and 2022.

Using this as an example, the role of coal and coal-fired electricity in safeguarding and supporting China's energy security has been re-understood. Today, the world is undergoing major changes that have not occurred in 100 years, and uncertainty in the international environment is clearly rising. Under the guidance of “you must take the job of energy into your own hands,” energy policies have re-balanced security and economic goals.

Question 3: If coal prices fall in the market, what are the risks of lowering electricity prices to affect the ignition price difference?

Guojin Securities said that the review revealed that coal prices in the market began a downward trend until 6M13, but the 2013 thermal power industry index experienced a sharp drop from late May to late June. The main reason was that rumors of a reduction in coal-fired benchmark electricity prices began to appear in the market, raising concerns about the sustainability of thermal power profits.

Guojin Securities believes that the current downside risk of electricity prices is limited. The main reason is: (1) Although the marketization of electricity has increased the frequency of coal-to-electricity price linkages, it has also restored the commercial properties of electricity, making prices more realistically reflect costs, supply and demand. When costs fall, supply and demand will support prices. Furthermore, electricity has completed price discovery in high-frequency transactions and provided guidelines for medium- to long-term electricity prices. In provinces where the electricity spot market continues to operate, it is difficult to interfere with electricity prices through administrative means; instead, uncertainty has declined.

(2) With the emergence of new electricity consumption scenarios such as new energy vehicles and AIGC, and frequent extreme weather under climate change, China's per capita electricity consumption has not reached its peak. The effective installed capacity of new energy sources is insufficient, and the demand for adjustable capacity in power systems is still increasing. As the main power source in traditional power systems, coal power has stable and controllable characteristics. After transformation, it will become the main provider of system backup capacity, and the correlation between cost and revenue and power generation capacity has declined. However, the power industry is the most important downstream of coal. In a situation where demand from the non-electricity industry lacks support, the bargaining power upstream and downstream of the industrial chain has begun to shift.

Based on this, Guojin Securities determined that coal power can maintain a relatively stable ignition price difference until a new type of adjustable power source outperforms advanced coal machines in terms of safety, cleanliness, and economy.

Investment advice

Idea 1: When fuel costs decline, supply and demand will support electricity prices. It is recommended to focus on thermal power companies whose power generation assets are mainly located in regions where electricity supply and demand are tight and competition on the power generation side is good, such as Zhejiang Electric Power (600023.SH), Waneng Electric Power (000543.SZ), and Huadian International (600027.SH).

Idea 2: The domestic production side is expected to contribute more to the increase in coal supply in 2024 than imports. It is recommended to focus on thermal power companies with power generation assets in the Midwest and fuel procurement mainly from Kengkou coal, such as Construction Investment Energy (000600.SZ) and Datang Power Generation (601991.SH).

Risk warning

The marketization of electricity fell short of expectations, demand for electricity fell short of expectations, geopolitical conflict worsened, the risk of a sharp rise in international energy prices, and the implementation of capacity policies and the progress of capacity market construction fell short of expectations.