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Glencore slips on weak thermal coal prospects

Glencore has slipped back after Morgan Stanley pointed to poor prospects for its thermal coal business.

Following a visit to Chinese coal province Shanxi, the bank issued a downbeat note on Glencore, with an equal weight rating and 270p price target. Glencore is currently down 3.6p or 1.2% at 286.15p. Morgan Stanley said:

    Thermal coal mining is unlikely to become a large profit contributor for Glencore soon we think. Our visit to China’s Shanxi coal province confirms that oversupply and poor demand will keep prices around current spot levels for the foreseeable future.

    Thermal coal accounts for around 17% of Glencore’s Industrial Group revenues on spot and 16% of EBITDA ($1.5bn) in 2015. At the peak in 2011 this business generated $3.3bn EBITDA. Although costs have declined, global overcapacity continues to keep spot prices depressed, which will keep a lid on Glencore’s thermal coal mining profits.

    Our meetings in Shanxi province indicated that the domestic thermal coal industry continues to cut production to improve supply and demand balance and stabilise prices. However, it is often a reduction in utilisation rather than a process of full market exit. As a result, if a price recovery were to take place capacity could return. Furthermore, replacement of import coal by domestic production was mentioned as another source of supply and demand rebalancing.

    Producers are looking for alternative applications of coal such as coal to chemicals, coal to gas (a by product from the coking process) and coal to liquids. However, we found little evidence that these technologies are successfully applied on a large scale. Consequently, we do not expect substantial coal demand from these technologies in the near term. Furthermore, export of thermal coal was not mentioned as a potential for the region. On the other hand, export of coking coal or coke was mentioned several times as a potential growth area.

    Last week we visited independent power producers, construction companies, iron ore traders, coal mining companies, property developers and cement producers. Those meetings suggested that industrial demand growth and growth of electricity consumption will remain weak as well. As a result, global seaborne thermal coal prices are likely to remain weak for the foreseeable future, limiting Glencore’s earnings power in mining.

source: http://www.theguardian.com