Afternoon Surge! National Energy Administration to Strictly Inspect, Overproducing Coal Mines Shut Down, Plastic Prices Supported!

At noon on July 22, an important inspection notice circulated in the market, issued by the Comprehensive Department of the National Energy Administration, requiring all coal mines operating beyond their capacity to be ordered to suspend production for rectification. This move can be seen as a continuation of the "anti-involution" effort, like a stone thrown into the lake of the coal industry, stirring up waves. As a result, coking coal futures and coal sector stocks collectively surged, while there was also a noticeable support effect on the plastics industry.

Against the backdrop of society’s current emphasis on combating involution and eliminating outdated production capacity, the longstanding issue of overcapacity production in the coal industry has become increasingly problematic.

The overproduction not only disrupts the fair competition in the market, plunging the industry into a vicious "involution" cycle of low-price competition, but also poses significant safety hazards due to prolonged overload operations and the difficulty of ensuring safety measures. In the long run, this disordered production model is detrimental to the rational development and sustainable use of coal resources. The issuance of the notice by the National Energy Administration comes at the right time, aiming to firmly curb such improper production behavior and promote the healthy and orderly development of the coal industry.

From the perspective of the futures market, this policy will trigger a series of chain reactions. In the past, similar policies have led to significant market fluctuations. For instance, when Shanxi Province conducted the "three excesses" rectification of coal mines in 2024, the expectation of supply contraction led to a strong rise in coke and coal futures, with the main coking coal futures soaring by nearly 9% and the main coke futures rising over 6%. This time, the nationwide comprehensive rectification against excessive capacity production is expected to tighten supply expectations in the coal futures market. Consequently, after the announcement, the main coking coal futures contract surged to the limit, reflecting the market's enthusiastic sentiment. The significant rise in coal prices also supported downstream coal chemical products from the cost side.

Figure: Intraday chart of major contracts in the coal chemical industry chain

The stock market has also been significantly boosted, with a surge of limit-ups in the coal sector. With the shutdown and rectification of coal mines with excessive production capacity, the effective supply in the coal market will be reasonably regulated, avoiding large price fluctuations caused by oversupply. This will create a more favorable market environment for high-quality coal enterprises and further promote industry consolidation. Among the many coal enterprises, China Shenhua, Shaanxi Coal and Chemical Industry, Yancoal Energy, China Coal Energy, Shanxi Coal International, Shanxi Coking Coal, Shaanxi Energy, and Guanghui Energy have notable advantages.

In summary, the Energy Administration's production restrictions on ultra-capacity coal mines demonstrate a further deepening of the "anti-involution" campaign. After nearly two years of prolonged involution, the anti-involution movement may change the logic of market operations, leading to a continued recovery in the valuation of commodities and stock markets.

Author: Zhou Yongle, Senior Market Analysis Expert at Zhuansu Vision