For years, the narrative surrounding the coal sector primarily revolved around its cyclical nature, which is deeply intertwined with broader economic trends. Investors keenly observed fluctuations in coal prices and production in the context of economic cycles, often categorizing coal as a cyclical commodity in their investment frameworks. This cyclical investment perspective can be traced back to the significant upturns that the coal industry experienced at various points, particularly during what might be called its golden era, which commenced in the early 2000s.
Begun in 2001, the coal industry witnessed an unprecedented surge in both output and prices, marking the inception of a remarkable ten-year growth trajectory. The profits for coal companies during this period skyrocketed from 8.57 billion yuan in 2003 to an astounding 87.19 billion yuan by 2007, representing an annual growth rate of approximately 59%. Such drastic increases in profitability signaled a booming demand for coal, driven primarily by rapid industrial expansion and power generation needs.
However, the landscape shifted dramatically in 2008, as the global financial crisis erupted, leading to widespread economic turmoil. Nevertheless, the Chinese government responded with a substantial stimulus package—often referred to as the "four trillion" plan—which spurred demand particularly in electricity, steel, and construction materials sectors. This massive government intervention served to reignite the coal industry's fortunes. Both production and profits achieved historic peaks as the coal sector entered yet another prosperous phase, underpinned by continued demand in the domestic market.
By 2011, the coal industry reached the zenith of its production capabilities as new capacity additions hit all-time highs. However, this phase was not without its challenges; the impact of the stimulus began to wane, leading to an oversupply of coal. By 2015, over 90% of coal companies were in the red, with total profits plummeting to less than 50 billion yuan. The industry faced a crisis, stemming from both extreme oversupply and rapidly increasing operational costs.
Amidst these turmoil-filled years, policy shifts emerged to revitalize demand. The 2015 "shelter reform monetization" led to an explosive growth in the real estate market, which in turn reinvigorated demand for coal in downstream sectors. Inventories fell sharply as consumers began to replenish their stocks in response to growing demand.
By 2016, the government's focus shifted towards supply-side reforms, which included significant efforts to eliminate outdated production capacity. During a three-year timeframe from 2016 to 2019, a staggering 920 million tons of backward production capacity was eliminated, reducing the number of operating coal mines from about 10,800 in 2015 to approximately 5,300 by 2019. This consolidation served to increase the industry’s overall concentration and efficiency.
As the world grappled with the impact of the COVID-19 pandemic, demand for coal rebounded quite dramatically. Fuelled by skyrocketing international coal prices, the coal industry found itself once again in a period of profitability. Coupled with the introduction of carbon neutrality policies in China and a concurrent decline in hydropower outputs, coal demand surged. Between 2021 and 2023, the industry ramped up production significantly, achieving record profits in 2022 that surpassed any previous highs.
Looking ahead, the coal industry faces an intriguing yet complex outlook. For one, new production capacities in the sector remain at historically low levels, leading to sustained supply constraints. This situation may prompt the sector to confront supply reliability challenges in the long term. On the demand side, coal-fired power generation continues to hold its dominant position in the energy market, despite the emergence of renewable energy sources.
In 2023, a notice was released regarding the establishment of a price mechanism for coal-fired electricity, transitioning from a single price model to a dual pricing structure that incorporates both capacity and power pricing. This adjustment aims to reinforce the role of coal as a stabilizing force within the energy system, implying recognition of its irreplaceable contribution, at least in the near term.
China, rich in coal yet lacking in oil and gas, remains highly reliant on coal for energy security. Furthermore, the global landscape for coal demand is shifting as manufacturing capacities relocate to countries like India and those in Southeast Asia. The energy consumption in these regions is on a consistent rise, indicating increased overseas demand for coal. India, in particular, has emerged as the world’s second-largest importer of coal, prompting forecasts that suggest China will be importing progressively less coal in the years to come.
Climate goals, particularly the push towards carbon neutrality, will not be achieved overnight. The recent guidance from the government has postponed steel industry carbon peak goals from 2025 to 2030, reflecting the reality that traditional energy sources will need to phase out gradually in favor of reliable new energy alternatives.
One unique aspect of the coal industry is its apparent lack of supply elasticity. In contrast to other sectors that cycle through periods of overproduction and subsequent downturns, coal might be the only industry that has successfully broken this cycle, retaining its relevance even amid fluctuations in demand.
In analyzing the rise and fall of different industries over the past several years, it becomes clear that the cement sector enjoyed unprecedented growth between 2016 and 2020, with prices soaring over 65%. Simultaneously, lithium carbonate, driven by the surge in electric vehicles, saw its prices leap from 50,000 yuan to 500,000 yuan, showcasing the volatility inherent in commodity markets. However, subsequent surges in production capacity led to significant oversupplies and a downward cycle in prices. Conversely, post-2020, the coal industry has seemingly escaped this fate, with both production and prices witnessing continuous growth to unprecedented heights.
The contrast is stark: many industries have faltered upon reaching peak levels of output, while coal has maintained its profitability despite systemic challenges and emerging cost pressures. Following the surge that began in the latter half of 2020, the coal industry's profits consistently set new records while fixed asset investments did not exhibit significant expansions—indicative of a cautious stance from industry players post-2013 when past excess capacity led to painful adjustments.
Factors contributing to this phenomenon are numerous. The crisis following the 2008 stimulus-induced demand, which brought about significant capacity expansions, eventually resulted in excess production issues by 2015, with the bulk of coal firms operating at a loss. The subsequent capacity reduction policies enacted from 2016 to 2019 imposed a level of restraint on the industry, ensuring a painful yet necessary recalibration of growth ambitions.
Lastly, current low-interest rates paired with a scarcity of attractive investment assets have fueled renewed interest in dividend-yielding investments. The persistent decline of 10-year Treasury rates hints at a long-term low-rate environment in China, thereby enhancing the appeal of dividend assets for long-term institutional investors, particularly those in the insurance sector who need to align with long-term interest rates. As coal prices hovered around 800 yuan per ton by the end of August 2023, it became apparent that insurance capital would gravitate towards coal, reinforcing its position as an attractive investment avenue in a landscape characterized by diminishing high-return options.