Iran war triggers global oil shock as China pivots back to coal for energy security

The global oil supply shock triggered by the war in Iran is providing a strategic tailwind to China’s coal sector, which had previously been reeling under the weight of chronic oversupply and the nation’s aggressive pivot toward renewable energy.

Largely insulated from external shocks due to massive domestic production, coal serves as China’s primary hedge against volatile petroleum markets. Furthermore, several Chinese producers possess the industrial capacity to convert coal into critical chemicals—such as methanol and urea—sectors where traditional feedstocks are seeing tightening supplies.

Zhang Changyan, CEO of state-controlled China Shenhua Energy, one of the world’s largest coal miners, noted on Thursday that elevated crude oil and natural gas prices stemming from the Middle East conflict have “stimulated a temporary surge in coal demand.”

Speaking at an online earnings briefing, Zhang detailed the two-fold impact of the crisis. “First, certain nations may increase the share of coal-fired power generation due to natural gas supply constraints or surging prices,” he said. “Second, rising raw material costs for petrochemicals improve the profitability of coal-based chemical industries, leading to higher coal consumption in the chemical sector.”

Shenhua recently unveiled plans in December to acquire a suite of companies from its majority shareholder, China Energy, for 133.6 billion yuan ($19.4 billion). Zhang stated that the production target for this year remains steady at 330.2 million metric tons, though he noted this figure would be reassessed once the acquisitions are finalized.

Li Wei, chairman of rival miner Yankuang Energy Group, emphasized the fuel’s indispensable role in national energy security. During a press conference in Hong Kong this week, Li observed that while the installed capacity of new energy sources has overtaken thermal power, the actual volume of electricity generated by thermal plants remains significantly higher. According to National Bureau of Statistics data, coal accounted for 51.4% of China’s total energy consumption last year, a 1.8 percentage point decline from the previous year.

“Given that China currently imports approximately 70% of its oil and nearly 50% of its natural gas, securing national energy security and mitigating risks related to the supply of essential chemical raw materials are matters of critical importance,” Li said.

Yankuang, a unit of state-owned Shandong Energy, aims to produce between 190 million and 194 million tons of coal this year. It also plans to output up to 11 million tons of chemical products, up from last year’s 9.77 million tons.

The industry’s expansion continues despite the broader green transition. According to the Centre for Research on Energy and Clean Air, China brought 78 gigawatts of new coal power capacity online in 2025. An additional 291 GW is currently either permitted or under construction.

Until recently, the mining sector struggled with overcapacity amid tepid domestic demand. Utilization rates fell to 68.9% in the third quarter of last year, the lowest level since the onset of the COVID-19 pandemic in 2020, according to government data. Yankuang’s net profit reflected this downturn, sliding 42% year-on-year to 8.5 billion yuan in 2025.

The landscape has since shifted, and investors have turned bullish on Chinese coal firms in anticipation of improved margins. Yankuang’s Hong Kong-listed shares have surged by more than 50% so far this year, dramatically outperforming the broader Hang Seng Index, which has declined 2%. The Hong Kong exchange was closed Friday for a public holiday.

Policy support is also firming up. The Ministry of Industry and Information Technology, alongside other agencies, released an action plan on Friday to modernize the petrochemical sector through 2029. The directive urges local governments and enterprises to prioritize the upgrading of aging facilities in oil refining, ethylene production, and coal-to-methanol sectors.

Another state giant, China Coal Energy, is expanding its coal-to-olefin operations in regions such as Shanxi and Xinjiang, a company official said during a Wednesday earnings call. The firm is also conducting research into coal-to-liquid and coal-to-LNG technologies, though the official cautioned that coal-to-oil production currently faces thin margins and technological hurdles.

The long-term extent of this demand recovery remains uncertain. China maintains substantial petroleum reserves and is generally less dependent on Middle Eastern crude than its Asian neighbors, thanks in part to its existing reliance on domestic coal. Spot prices at Chinese ports remained relatively stable in March as heating demand began its seasonal taper following the winter months.