Morgan Stanley: China Coal; Benefiting from Rising Seaborne Prices; Tactically Upgrade Coal
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Executive Summary: Escalating conflict in the Middle East has driven up energy prices, specifically surging seaborne thermal coal costs, which may trigger a demand shift toward coal in Asia. Morgan Stanley estimates that if Qatar's LNG export disruptions persist, Japan, South Korea, and Taiwan could see an additional 1.5–2.0 million metric tons of thermal coal import demand per month, representing an 8–10% increase in total coal import demand. While domestic Chinese coal prices are expected to rise year-on-year, the sector faces downward pressure during the second-quarter consumption lull.
Key Drivers & Logic: The Middle East accounts for approximately 30% of global energy supply, with the Strait of Hormuz handling 20–30% of global crude oil shipping. South Asian nations rely heavily on Qatar for LNG (60% of regional supply), while Northeast Asia accounts for ~15%. To mitigate exposure to high spot LNG prices, Asian utilities are considering switching from gas to coal-fired generation. If disruptions continue for months, South Asian utilities could also add 1.0–1.5 million metric tons of seaborne imports monthly.
Market Impact: In an extreme scenario, incremental coal volumes account for only ~1.3% of China's effective thermal supply, with actual impact likely lower due to high operating rates in coal chemical industries. High import coal prices and the closing of arbitrage windows provide a price floor for domestic rates. Low Australian diesel inventories (32 days) pose a secondary risk; prolonged conflict could disrupt Australian mine production, further elevating seaborne freight costs.
Rating Actions: Morgan Stanley tactically upgrades Yankuang Energy H-share (1171.HK), China Coal Energy H-share (1898.HK), and Shaanxi Coal