The coal-to-chemicals sector, which emerged as a key pillar of thermal coal demand in the first half of the year amid surging oil prices, is now facing a profit squeeze that could temper its appetite for feedstock coal and shift procurement patterns from aggressive stockpiling to a more cautious stance.

The core factor behind the margin squeeze is the significant erosion of the cost advantage of coal-based chemicals. Domestic coal prices have been trending higher this year, with the upcoming seasonal peak demand period and increased mine safety inspections adding upward pressure on prices and raising feedstock costs.

Feedstock coal accounts for over 70% of production costs in coal-to-chemicals, making it the key variable for profitability. Mine-mouth prices have proven more resilient than portside prices. Since mid-June, despite a sustained decline in thermal coal prices at ports, prices at production sites have not shown a clear downward trend, supported by tight supply. Moreover, as most chemical feedstock coal is supplied under long-term contracts with prices that lag spot market movements, cost rigidity has been reinforced.

At the same time, the second quarter marks a seasonal lull for traditional downstream chemical products. Operating rates for formaldehyde and acetic acid have fallen, while methanol-to-olefins (MTO) units have cut loads due to weak olefin margins. Agricultural fertilizer demand has also softened, with urea industrial demand remaining subdued. The inability to pass on higher costs downstream has created a price "scissors gap", directly squeezing gross margins for coal-to-chemical producers.

On the other hand, the phased easing of geopolitical tensions has pulled crude oil prices lower, partially restoring margins for oil-based chemicals and indirectly narrowing the profit advantage of coal-based routes.

So far, the margin contraction has not yet had a significant impact on the overall coal-to-chemicals sector. Data shows that operating rates for methanol and urea remain at or above 100%, with daily urea output in China currently stable at 215,000-219,000 tonnes, near historical highs for the period.

Large-scale coal-to-chemical plants are typically integrated complexes with high restart costs and diversified profit sources, making them reluctant to cut output. Many have locked in relatively low-priced long-term contract coal, keeping actual costs below spot market levels and preserving some profitability. Some chemical products are also subject to supply guarantee policy constraints.

However, with downstream product prices entering a downward cycle, the uptrend in coal-to-chemicals operating rates is likely to have peaked and may soon enter a phase of high-level fluctuation.

During the high-profit period, coal-to-chemical firms generally built up feedstock coal inventories, even stockpiling, to hedge against spot price volatility. But as margins shrink, procurement will turn cautious, with companies likely to buy only as needed to avoid inventory devaluation risks.

At the same time, they will prioritize the fulfillment and haulage of long-term contract coal to control costs, reducing sensitivity to spot prices and cutting spot purchases.