Chinese government action to cut pollution levels over the winter heating season could wipe out import demand for thermal coal, Liberum reckons.
The broker has responded to the Chinese government’s instructions to industries in 28 northern cities to take action to curb smog levels this winter by cutting its rating for commodities group Glencore PLC (LON:GLEN) to ‘sell’ from ‘hold’, though the price target has been raised to 300p from 285p.
Glencore shares currently trade at 378.5p.
“The proposed cuts to domestic Chinese industry over winter are dramatic and have far reaching consequences for the mining equities, according to Liberum’s Ben Davis.
The market has taken on board the likely impact on demand for low grade iron ore and coking coal, but Davis speculates that demand for seaborne thermal coal imports will be hit just as hard.
“If the brunt of this cut was felt through seaborne demand (rather than a weaker low quality domestic supply or restocking activity), then in theory imports could drop close to zero. Whilst this is the extreme bear case scenario, thermal coal is not as well supported as we had previously expected and assume prices to fall to $75/t from currently $95/t by year end,” Davis wrote.