21 October 2016
Coal stocks rallied after hovering low for a long time, but government efforts to cut emissions may dim the sector's outlook. Photo: Reuters
Coal stocks rallied after hovering low for a long time, but government efforts to cut emissions may dim the sector's outlook. Photo: Reuters

A-share market rebounds but volume remains low

The Shanghai Composite Index rose 2.51 percent to close at 3,520 points on Monday.

The heavily-weighted financial sector outperformed with the shares of several brokers and insurers reaching the 10 percent daily limit. Coal and non-ferrous metal stocks also reported increases.

But turnover on the Shanghai and Shenzhen exchanges remained low at 672.25 billion yuan (US$103.96 billion). Such a low transaction volume may cap potential rises of the index.

Macroeconomic data for November released during the weekend shows signs of economic recovery, helping improve market sentiment.

Coal and non-ferrous metal sectors, which have high correlation with the economic cycle, attracted investors’ attention.

Guizhou Panjiang Refined Coal Co. Ltd. (600395.CN) and Shandong Gold Mining Co. Ltd (600547.CN) rose 10 percent, Yunnan Chihong Zinc & Germanium Co. Ltd. (600497.CN) was up 8.5 percent while Zhongjin Gold Co. Ltd. (600489.CN) climbed 7.7 percent.

It’s reasonable for the coal stocks to rebound after hovering low for a long time. But as the government steps up efforts to cut emissions and adopt green production strategies, the long-term outlook for the coal industry is dim.

It may not be a good time for investors to go bargain-hunting in the sector.

Due to decelerating economic growth, the equipment utilization hours of thermal power stations in the first three quarters was 3,330 hours, marking a decrease for the 20th month in a row.

Meanwhile, amid low coal prices, on-grid wholesale prices for thermal electricity were lowered several times. The profitability of thermal power companies will remain under pressure.

The iron and steel industry, a big consumer of electricity, remains sluggish. Waves of layoffs have spilled over from small businesses to state-owned enterprises.

Wuhan Iron and Steel Co. Ltd. (600005.CN) recently announced its plan to cut 6,196 jobs, or over 20 percent of the total number of staff, within three months.

In the first nine months, the company recorded a loss of 1 billion yuan amid high labor costs and low productivity.

The layoff plan was welcomed by the market, sending its share price up 3.9 percent on Monday.

Although the latest data shows signs of recovery, the challenges companies face remain severe.

To further stimulate economic growth, top leaders reiterated that the real estate market should resolve its supply issues and stabilize the market.

Urbanization is regarded as a growth engine, which could benefit property and building material stocks.

Property stocks have been climbing for some time, but underperformed the broader market on Monday with only a 1.68 percent increase. Building material stocks rose 3.51 percent.

This article appeared in the Hong Kong Economic Journal on Dec. 15.

Translation by Myssie You

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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