Shares of Glencore Dip on Poor Thermal Coal Forecasts

Wednesday May 27, 2015, 11:10am PDT

According to a report from the Guardian, Glencore’s (LSE:GLEN) shares were down slightly on Wednesday, and Morgan Stanley pegged weak thermal coal prospects as a driving factor.

 

The news outlet quoted Morgan Stanley as saying:

 

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.