Zhejiang Merchants Securities: Capacity replacement constraints coal supply, reserve capacity releases elasticity

According to the Zheshang Securities research report, based on national policies and relevant corporate announcements, since 2021, the country has increased a batch of coal mine production capacity. By the end of 2025, if companies fail to fulfill their commitments regarding capacity replacement, the newly increased coal mine capacity may face the risk of being revoked. Calculations indicate that under the principle of reduced replacement, China's coal mine capacity replacement indicators may not be sufficient to support all newly increased capacity in obtaining capacity indicators. Furthermore, if the capacity replacement indicator policy is strictly enforced, production cuts will be necessary in the future. To address the issue of capacity release being restricted by capacity indicators, the state has established a coal production capacity reserve system to reduce some capacity replacement indicators. Under the current policy, the supply and demand in the coal industry is expected to gradually balance, and coal prices are set to rise steadily.

The main viewpoints of Zheshang Securities are as follows:

The capacity replacement policy is a core tool for supply-side structural reform

The core goal of the capacity replacement policy is to "control the total amount and optimize the existing stock." Through the principles of "reduced replacement" or "equal replacement," it ensures that while new advanced capacity is being built, outdated capacity must be eliminated, thereby achieving a total industry capacity that only decreases and does not increase, guiding the optimization of industrial layout and technological upgrades. Through market-oriented and legal means, it not only limits the total capacity but also improves the quality of capacity, serving as an important pathway for promoting high-quality development in overcapacity industries.

Supply-side structural reform period (2016-2020)

Coal production exceeded demand, and the allocation policy for capacity indicators became tighter, adopting a reduced replacement policy, providing exit subsidies to coal mines to narrow the capacity indicator replacement ratio, and increasing the replacement capacity ratio for newly built coal mines. For example, it requires that the capacity of closed coal mines should generally not be less than 120% of the capacity of newly constructed coal mines.

Production increase and supply guarantee period (2021-2025)

To implement supply guarantee requirements and urge the rapid realization of coal production capacity, the capacity indicator allocation policy adheres to the principles of "reduced replacement" or "equal replacement," but adopts a commitment system for capacity indicator fulfillment. Newly increased coal mines can first make commitments and receive preliminary approvals, with subsequent fulfillment of capacity replacement indicators.

Capacity commitment system and its penalty mechanism

The capacity replacement commitment system is an important policy implemented to optimize coal production capacity management, promote supply-side structural reform in the coal industry, and ensure national energy security. Since 2021, a batch of coal mine capacity has been increased, and by the end of 2025, if companies fail to fulfill their commitments regarding capacity replacement, they will face penalties such as being listed on the coal industry’s dishonesty list, revocation of their capacity increase approvals, and not being accepted for capacity increase applications for three years. The newly increased coal mine capacity may face the risk of being revoked.

Capacity replacement indicators constrain coal mine production capacity

Based on the capacity baseline from 2015 and the capacity exit situation during the 13th Five-Year Plan, combined with the requirements for reduced capacity replacement (respectively at 80%, 60%, and 50% reduced replacement), the legal capacity limits are calculated to be 4.7, 4.5, and 4.4 billion tons/year, which is lower than the 2024 production of 4.76 billion tons. If the capacity replacement indicator policy is strictly enforced, production cuts will be necessary in the future. To address the issue of capacity release being restricted by capacity indicators, the state has established a coal production capacity reserve system to reduce some capacity replacement indicators Target Aspect

Prioritize attention on thermal coal companies China Shenhua (601088.SH), Shaanxi Coal and Chemical Industry (601225.SH), China Coal Energy (601898.SH), Yanzhou Coal Mining (600188.SH), Guanghui Energy (600256.SH), Haohua Energy (601101.SH), Jinkong Coal Industry (601001.SH), and Huayang Co., Ltd. (600348.SH); for coking coal companies, focus on Huaibei Mining (600985.SH), Shanxi Coking Coal (000983.SZ), Lu'an EED (601699.SH), and PINGMEI COAL (601666.SH).

Risk Warning

Overseas economic growth slowdown. If overseas economic growth falls short of expectations, it may lead to sluggish global energy and coal demand, while also causing a decline in domestic coal consumption demand.

Significant release of coal production capacity. As the optimization of coal industry capacity progresses, there may be a release of coal production capacity exceeding expectations, resulting in supply exceeding demand and causing a significant drop in coal prices.

New energy replacing coal. Under carbon neutrality policies, low-cost, low-emission new energy technologies may replace part of the demand for coal, leading to a decline in coal demand.

Impact of coal mine safety accidents. The occurrence of safety accidents may lead to business suspensions and adjustments, affecting production and operations