Diminished Chinese Demand Could Impact Glencore

We are reducing our long-term metallurgical coal price forecast based on a diminished outlook for Chinese steel demand

Daniel Rohr, CFA 6 October, 2014 | 8:00AM
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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 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.

We now expect Chinese steel production to peak at 800 million metric tons in 2014 and forecast output of 730 million metric tons in 2018 (a 9% drop). Our new outlook breaks from traditional methods as it focuses on the country's stock of steel in use, not its annual steel consumption. At 5.2 metric tons per capita, China's steel stock is nearly 3 times the norm for countries of comparable GDP per capita. China's additions to its steel stock slow over our forecast horizon.

Meanwhile, we expect improvements to the rail infrastructure linking China's coal-producing and coal-consuming regions to boost the competitiveness of domestic coal supplies. In recent years, China’s surging demand for steelmaking coal outstripped its ability to cost-effectively transport coal from mine to consumer. In the context of weaker demand growth, the ongoing railway build-out will drive down domestic costs and diminish import needs.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Anglo American PLC2,762.50 GBX-1.99Rating
Glencore PLC360.10 GBX-2.65Rating

About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.