Glencore and South32 downgraded as weak oil prices expected to spill into coal

Expecting weakness in the oil price to spill over into the coal markets, Jefferies downgraded Glencore PLC (LON:GLEN) and South32 Ltd (LON:S32).

Analysts at the bank cut forecasts for coal as they expect some substitution from coal to cheap gas.

Amid the macroeconomic downturn as a result of the coronavirus pandemic, thermal coal demand is likely to remain weak in the near-term, while metallurgical coal prices are expected to downside risk due to the lockdowns in India and a resumption of exports from Mongolia to China.

“In the long term, coal miners are disadvantaged due to secular demand risks and an ESG overhang that structurally impairs valuations for coal mining equities.

While coal mining shares are inexpensive, the Jefferies analysts said, “this is justified based on fundamentals, in our view”.

As a result of the more negative view on coal, Glencore was cut to ‘hold’ from ‘buy’ as the share price target was lower to 150p from 175p, while S32 was downgraded to ‘underperform’ from ‘hold’ as the price target was trimmed to 80p from 90p.

“These shares have fallen a lot already, but the risk/reward tradeoff in these names is still not favourable, in our view.

“In addition, in a recovery scenario, we would expect coal mining equities to lag due to ESG concerns and structural demand issues.”

The analysts said “we prefer to stay defensive in mining for now”, with Rio Tinto (LON:RIO) top pick with a price target of 4,400p.