Two reforms power coal, metal uptrend

Overcapacity reduction and optimization of industrial structure in China are likely to boost not only output, product prices and profits of efficient listed coal and metal companies but their shares, experts said.

In the A-share market, stocks of listed companies in the coal, steel and nonferrous metal sectors have risen in recent days.

Higher product prices have improved companies' financial performance, especially of those in cyclical industries like coal, iron and steel, and nonferrous metals.

This, in turn, is fueling the uptrend in their shares, said Zhan Sheng, investment director of JZ Investment, a subsidiary of JZ Securities. "Higher product prices will boost profits as the costs are fixed."

According to forecasts of quarterly financial results, listed companies in these sectors will see significant growth. If their forecasts come to pass, shares would remain stable at the current level, he said.

According to companies' forecasts, total first-half net profit of 25 ordinary-steel enterprises will likely surge by 314 percent year-on-year, with Beijing Shougang leading the pack with a staggering 5,523 percent jump.

The company's stock closed at 7.44 yuan on Friday in Shanghai, up 108 percent from 3.58 yuan on June 24 last year.

As of July 14, 57 nonferrous metal companies issued earnings forecasts, and 49 of them expect higher first-half profits－and six, including Yunnan Tin, are estimated to see their profits rise more than 10 times year-on-year.

The Nonferrous Metal Index of the Shanghai Stock Exchange has risen more than 8 percent this month, outperforming the benchmark Composite Index that rose more than 7 percent.

Of the 83 stocks of nonferrous metal companies that are traded on the secondary market, 70 have risen this month, with China Minmetals Rare Earth up nearly 27 percent.

According to Wind Information, coal companies expect strong growth on the back of higher prices. The average price of the 5,500 kcal power coal at Qinhuangdao port in the January-June period was 611.21 yuan ($90) per metric ton, up 61 percent year-on-year.

Coal supply is expected to rise in the short term, but given the output restrictions, the increase won't be much, said Zhang Min, an analyst at Sublime China Information Group in Zibo, Shandong province.

Coal prices will rise a bit the whole summer on high electricity consumption, she said.

Higher prices of nonferrous metals, especially cobalt and lithium that are used in the new energy industry, are expected to boost profits in the sector.

Wind's data show that the average price of cobalt No 1 in the Yangtze River nonferrous market was 368,004 yuan per ton in the first half of the year, up 83.21 percent year-on-year. Prices of such metals are expected to stay firm in the second half.

But prices of other metals like copper, aluminum and lead are expected to be unsteady in the second half, said Zhan.

According to Wind, the current price of rebar with 20-millimeter diameter is 3,829 yuan per ton. Its average price of 3,666 yuan in the first half was up by 56.5 percent year-on-year, and by 30.8 percent from the second half of 2016.

"The wholesale price of steel will remain at high levels, so the profit margin of iron and steel enterprises is expected to remain high too, on the back of weak prices of iron ore and coke," said Wang Guoqing, research director at the Lange Steel Information Research Center in Beijing. "The rebar price peak in the second half is expected to be higher than the price peak of the first half."