Higher Coal Price Forecasts Support Earnings; Metal Stocks See Tactical Rebound Opportunities

Overview

This report primarily updates the latest data and views on China's basic materials sector. The core change is that J.P. Morgan has raised its 2026-2028 domestic thermal coal price forecasts due to coal mine accidents in Shanxi and an early onset of summer, correspondingly lifting earnings forecasts and target prices for China Shenhua and Yankuang Energy, while maintaining 'Neutral' ratings. Meanwhile, the report analyzes the impact of the potential reopening of the Strait of Hormuz on the metals sector, suggesting that copper and gold stocks have tactical rebound potential, while the aluminum market, despite short-term pressure, retains its medium-to-long-term supply-demand deficit logic.

Core views

Coal Sector: Tightening supply-demand pushes up price forecasts. In May, China's raw coal output fell 2% YoY to 397 million tonnes, and imports dropped 8% YoY to 33.3 million tonnes. Driven jointly by safety inspections triggered by Shanxi coal mine accidents, Indonesian export restrictions, and an earlier-than-expected peak summer power demand, Qinhuangdao 5,500 kcal thermal coal spot prices rose to approximately RMB860/tonne in mid-June. Consequently, J.P. Morgan raised its 2026 domestic thermal coal average price forecast by 15% to RMB805/tonne and expects a 32 million tonne supply deficit in the domestic coal market in 2026. Based on this, it raised China Shenhua's 2026-2028 earnings forecasts by 2-7%, increasing the A-share target price from RMB43 to RMB45; and raised Yankuang Energy's earnings forecasts for the same period by 20-31%, increasing the A-share target price from RMB18 to RMB20. Non-ferrous Metals Sector: Geopolitical easing brings trading opportunities. With easing US-Iran tensions and expectations of the Strait of Hormuz reopening, metal stocks previously pressured by risk aversion are poised for a tactical rebound. The report selects Zijin Mining (copper/gold) as the top beneficiary. Regarding aluminum, although LME aluminum prices recently retreated to around USD3,358/tonne, mainly reflecting fading supply risk premiums and expectations of new capacity in Indonesia, J.P. Morgan's commodities team still forecasts a global primary aluminum shortage of 1.7 million tonnes in 2026, with implicit inventories sufficient for only two months of consumption. Therefore, it maintains a medium-term bullish stance, recommending Chalco and China Hongqiao, and advises monitoring their destocking progress and valuation re-rating potential. Steel and Lithium: Weak demand and price volatility. May crude steel output fell 3% YoY, and steel exports dropped 2% YoY. Due to high coking coal costs, steel mill margins declined further in early June (the share of profitable mills fell to 56%), making substantial improvement in industry profitability difficult in the short term. Lithium prices have stabilized around RMB165,000/tonne, but affected by global mine restarts and seasonal weakness in downstream EVs, prices are expected to range-trade at current levels in the near term, with volatility primarily driven by supply-side news.

Analysis framework

This report adopts a typical research framework of 'Macro Data Validation + Supply-Demand Model Revision + Event-Driven Analysis'. First, it interprets macroeconomic data released by the National Bureau of Statistics for May (such as real estate investment, FAI, industrial output, etc.) to confirm the overall weak tone of domestic bulk commodity demand. Second, for the coal sector, the firm updated supply-demand balance tables, incorporating supply disruptions caused by Shanxi accidents, earlier seasonal demand, and import policy changes into the model, thereby revising price assumptions and transmitting them to company earnings forecasts. Finally, combined with geopolitical events (Strait of Hormuz situation), it conducted event-driven analysis on the metals sector, distinguishing between different investment logics for short-term sentiment recovery (copper, gold) versus medium-to-long-term supply-demand fundamentals (aluminum, lithium).

Methodology notes

• Industry/Sector Analysis FrameworkSupply-demand framework

  Forecasting commodity price trends by constructing Supply-Demand Models

  The report calculates an expected supply deficit of 32 million tonnes in 2026 by updating coal production, imports, and demand by sub-sector, thereby supporting the view of rising prices. This is the core method for judging price trends in resource commodity research.

• Event Arbitrage and Behavioral FinanceEvent-driven analysis

  Logic of short-term shocks and recovery in asset prices due to geopolitical events

  The report analyzes how expectations of the Strait of Hormuz reopening eliminate previous 'war risk premiums,' leading to short-term pullbacks in metal prices, while pointing out that this provides tactical buying opportunities for quality names that were previously oversold.

• Valuation MethodologyNAV (Net Asset Value) Method

  Valuing resource companies using NPV/NAV models

  Target price calculations for Shenhua and Yankuang are based on NPV valuation models, deriving intrinsic value by discounting future cash flows and considering factors such as asset injections, then determining H-share target prices by combining A/H share premiums.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Shenhua (601088 CH / 1088 HK)

  Beneficiary: Higher coal price forecasts boost earnings expectations; high dividend yield offers defensiveness

  Strengths

  World's largest listed coal miner; 80% of sales under long-term contracts; high earnings visibility; high dividends

  Weaknesses

  Relatively limited growth; exposed to government price intervention risks

  Comparison

  Less earnings volatility and stronger defensive attributes compared to Yankuang

  Risks

  Strong government intervention in coal prices; hydropower/nuclear generation exceeding expectations crowding out thermal power

• Yankuang Energy (600188 CH / 1171 HK)

  Beneficiary: High spot exposure provides greater leverage to rising coal prices

  Strengths

  Only ~23% of sales under long-term contracts; fully benefits from spot price increases; payout ratio higher than traditional SOEs

  Weaknesses

  High earnings volatility; high capex commitments may affect dividend delivery

  Comparison

  Higher beta and price elasticity compared to Shenhua

  Risks

  Sharp coal price volatility; relaxation of import restrictions causing domestic price declines; high capex impacting cash flow

• Zijin Mining (2899 HK / 601899 CH)

  Beneficiary: Top pick for tactical rebound amid Hormuz reopening expectations

  Strengths

  Dual copper-gold drivers; benefits from risk appetite recovery following geopolitical easing

  Comparison

  Listed as the Top Pick in the metals sector

• Chalco (2600 HK / 601600 CH) / China Hongqiao (1378 HK)

  Beneficiary: Medium-term aluminum supply-demand deficit logic supports valuation re-rating

  Strengths

  Benefits from projected 1.7 million tonne primary aluminum deficit in 2026 and destocking process

  Weaknesses

  Short-term pressure from Middle East inventory releases and Indonesian new capacity expectations

  Comparison

  Potential for valuation re-rating compared to overseas peers

Key data

• 2026E Thermal Coal Price ForecastRMB805/tonneRaised 15% from previous forecast; full-year supply deficit of 32 million tonnes expected
• Shenhua-A Earnings Forecast AdjustmentRaised 2-7%2026-2028 EPS forecasts raised; target price increased to RMB45
• Yankuang-A Earnings Forecast AdjustmentRaised 20-31%Benefiting from high spot exposure and rising coal prices; target price increased to RMB20
• May Raw Coal Output397 million tonnesDown 2% YoY
• 2026E Primary Aluminum Deficit1.7 million tonnesGlobal forecast supporting medium-term aluminum prices
• Lithium Carbonate Price Support Level~RMB165,000/tonneRecent stabilization level; short-term range-bound trading expected

Impact & implications

For coal companies, especially those with high spot sales ratios like Yankuang, the upward revision in coal price forecasts translates directly into significant earnings leverage. Although the rating remains Neutral, the higher target price reflects improved fundamentals. For Shenhua, a high proportion of long-term contracts makes earnings more stable and dividends attractive. For metals investors, the easing of the Hormuz situation is an important trading signal, suggesting a shift from pure risk aversion to focusing on growth-oriented copper and gold leaders (e.g., Zijin Mining). Investors in the aluminum sector should ignore short-term LME price fluctuations and focus on domestic destocking progress and the realization of the 2026 supply-demand deficit.

Risks

• Stronger-than-expected government intervention in coal prices
• Hydropower, renewable energy, or nuclear generation exceeding expectations, crowding out thermal power demand
• Yankuang failing to deliver committed dividends due to high capex and coal price volatility
• Relaxation of coal import restrictions leading to domestic coal price declines
• Slowing overseas procurement and intensified price competition in Southeast Asian markets affecting steel exports

What to watch

• Progress of Shanxi coal mine resumptions and actual output recovery
• Specific developments in the reopening of the Strait of Hormuz and actual impacts on metal supply chains
• Destocking pace of aluminum social inventories and consumption of implicit inventories
• June-July arrival volumes of Zimbabwean lithium concentrate and CATL's production resumption pace
• Subsequent trends in domestic real estate new starts and completion data