Our Rio Tinto (RIO) fair value estimate declines 6% to AUS$ 56 per share following reductions to our coal price forecasts. We are reducing our long-term metallurgical coal price forecast to $130 from $160 based on a diminished outlook for Chinese steel demand.
Amid weaker Chinese steel demand and lower domestic Chinese freight costs, we expect China's import met coal needs to decline, eliminating what had been a key source of growth for the market. We expect global seaborne demand growth to slow considerably, with India the main source of incremental demand going forward.
Further we expect improvements to the rail infrastructure linking China's coal-producing and coal-consuming regions to boost the competitiveness of domestic coal supplies. We base our USD 130 long-term price forecast, expressed in constant 2014 U.S. dollars, on the outlook for Chinese marginal costs. We expect prices to improve over the next few years as loss-making supply in the U.S. and Australia closes, bringing the market back into balance.
Our 2014 and 2015 earnings forecasts decline 3% and 6% to AUD 5.32 per share and AUD 3.36 per share respectively. At our reduced fair value Rio Tinto is marginally overvalued. The company probably has the best iron ore business in the world and we remain positive on the outlook for capital and operating cost savings.
Reduced Pilbara iron ore network expansion capital costs support our narrow economic moat rating founded on low cost supply thanks to high quality geological deposits and economies of scale. However, we believe the market is being overly optimistic on the long term iron ore price and the excessive level of iron ore earnings reliance continues to dictate a preference for BHP Billiton's (BLT) more diversified earnings stream, a key factor in Rio's high fair value uncertainty to BHP's medium.
