Coal Price Fall Hits Rio Tinto

Analysts have downgraded their expectations for the long term coal price due to reduced demand from China. This has had a negative effect on the fair value estimate for Rio Tinto

Mark Taylor 21 October, 2014 | 12:42PM
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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. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BHP Group PLC2,041.50 GBP0.00Rating
Rio Tinto PLC4,578.50 GBP0.00Rating

About Author

Mark Taylor  is an equity analyst at Morningstar.