China's coal price boom is set to benefit local producers

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China's coal price boom is set to benefit local producers

TokYO - - Chinese goods producers are feeling squeezed by spiking input costs, but a wave of profit updates from the country resource producers highlight the windfall coming their way.

Beijing reported a 10.7% rise in its Producer Price Index annual growth for the first period since China began compiling such data 25 years ago. A key driver was higher prices for coal, the fuel used in most of the country's power plants.

Its board attributed the profit surge to the substantial increase in sales prices of basic products. Citigroup raised its annual profit forecast for China Shenhua Energy, China Coal's top competitor by 26%, with analyst Jack Shang citing higher coal prices and projected sales volumes.

China produced 3.9 billion tons of coal last year, the majority of global production according to statistics compiled by BP. The coal price boom is set to benefit the local producers as well.

Shenzhen-listed Shanxi Coking Coal Energy Group said on Friday that its third-quarter net profit was expected to be between 1.11 billion yuan and 1.34 billion yuan, which could again triple the level in last year's equity back to $2.1 billion at the top end. Jizhong Energy Group, based in the northern province of Hubei, said its quarterly net profit looks set to grow at a similar pace, reaching as much as 720 million yuan.

Henan Shenhuo Coal and Power, which produces aluminum the same, also looks at a near-tripling of its quarterly profit to 830 million yuan, with a new production facility for the metal giving an additional boost.

Despite the strong performance, commodities and special commodity-related assets continue to be a high conviction 'overweight' in our asset allocation into Q 4 as they remain supported by growing scarcity across physical markets, said Christian Mueller-Glissmann and Cecilia Mariotti of Goldman Sachs in a report last week, noting particular enthusiasm for aluminum and energy resources.

Shandong Hongchuang Aluminum Holdings this week said it expects to post a quarterly profit of as much as 10 million yuan, rebounding from a loss of 21.78 million yuan a year earlier.

Jiangxi Copper, the country's largest producer of the metal, said it would record a profit in nine months of up to 4.73 billion yuan. With higher prices for copper and sulfuric acid, this would triple the company's profits from the same period of 2020.

China's top lithium producers are seeing gains with the high Chinese price for lithium carbonate, a key ingredient in most electric vehicle batteries, hovering near an all-time high, as well as from investments in overseas peers.

Ganfeng Lithium said on Friday that it sees quarterly net profits exceeding 1 billion yuan, more than six times 2020's level. Part of the gain comes from a rise in the value of Ganfeng's stake in Australia's Pilbara minerals.

Rival Tianqi Lithium predicts a profit of between 340 million yuan and 510 million yuan, rebounding from a net loss of 406.71 million yuan a year ago when it was struggling to find new ways to avoid falling on banks. Tianqi will make an attractive investment in SQM, Chile's largest lithium miner.

Steelmakers look poised to do well as lower iron ore cost offset the blow felt from coal.

Angang Steel said it expects to record a quarterly profit of 2.31 billion yuan, a 181% rise from a year earlier. CITIC Pacific Special Steel Group said it foresees recording a more modest 18% gain profit gain.

While it is difficult to see the price of coking coal falling, the price of iron ore has been declining against the backdrop of more efforts that will likely be made to reduce crude steel production in the remainder of the year, said analyst Shinichiro Ozaki of Daiwa Capital Markets.

While China's major oil producers still released new profit forecasts even as crude prices climb, Sinopec Engineering, an arm of China Petroleum Chemical, said its contract backlog stood at 114.36 billion yuan as of Sept. 30, an 8.2% rise from the end of 2020.

Intermediate goods producers, however, are signaling a profit squeeze due to an inability to offset higher materials costs with price hikes.

Puyang Refactories Group, a leading supplier of steel mills, expects its quarterly net profit to halve from a year earlier. Construction materials manufacturer Guangzhou Jointas Chemical, carbon black producer Shandong Link Science Technology and rubber additive manufacturer Shandong Yangu Huatai sent similar warnings to shareholders.

On Thursday, the same token said that Shanghai Electric Power expects to record a quarterly net loss of up to 346 million yuan, a sharp reversal from earnings of 756 million during the first six months of the year.