We are lowering our long-term price outlook for seaborne metallurgical coal to $160 per metric ton from $215 to better reflect our expectation of weak Chinese steel production growth during the next several years. Absent China-driven demand growth, we expect the seaborne market to enter a state of oversupply as production in Queensland, Australia, recovers from weather and labour-related challenges and new low-cost supply comes on line around the globe. At a much lower market-clearing price than miners have enjoyed for the past several years, many higher-cost US mines and those producing lower-quality coals will be displaced from the seaborne market.
We expect Chinese demand for metallurgical coal to grow at low-single-digit rates during the next several years, weighing on the overall demand picture. After a decade of blistering growth, Chinese gross capital formation is likely to grow at a markedly slower pace in the years to come, meaning much lower growth in steel production and demand for associated raw materials like metallurgical coal. In the "low-growth" phase we envision for the Chinese steel industry, we would expect to see little, if any, growth in total metallurgical coal imports (land plus seaborne), since China's domestic coal industry should find it much easier to keep up with customer demand than it has in recent years.
Rising seaborne supplies, led by a recovery in Queensland, will be more than sufficient to cover incremental seaborne demand. Extreme flooding in 2010-11 and subsequent strike activity at BHP Billiton Mitsubishi Alliance (BMA), have kept Queensland--the source of roughly two thirds of global seaborne supply--running well below capacity during the past two years. This has had profound implications for the seaborne trade as mines in higher-cost regions like Central Appalachia have filled the gap. Queensland production should recover to more normal levels in the coming quarters, returning significant "lost" tonnage to the market. In addition, producers in Queensland and other lower-cost regions will add new mines originally planned amid the heady prices of the past several years.
Taking all of these factors into account, we have reduced our fair value estimates for major metallurgical coal producers. Among large diversified miners, our fair value estimate for Canada's 
Teck Resources (TCK.B) falls the most. We've made smaller valuation adjustments for London-traded Anglo American (AAL), Xstrata (XTA), Cliffs Natural Resources (CLF) and Vale (VALE), where exposure is lower.
Premium subscribers can read Daniel Rohr's revised outlook for Anglo American (AAL) and other miners, as well as learn about his revised fair value estimates for each company. Not a Premium subscriber? Get these reports immediately when you try Morningstar Premium for free for 14 days.
