Coal used to make steel is set to drop to the lowest price in two years, eroding earnings at BHP Billiton Ltd. and Rio Tinto Group, as European demand wanes and China shifts supply contracts to Mongolia from Australia.
The contract price may drop 11 percent to $200 a metric ton in the three months to Dec. 31 from $225 a ton this quarter, according to seven analysts and industry officials in a Bloomberg survey. The spot price in China fell 25 percent from the end of June to $177 yesterday, the lowest this year, according to data compiled by Bloomberg.
A deepening debt crisis in the eurozone has dragged down demand and prices of commodities, forcing the world's largest steelmaker ArcelorMittal to shutter or idle plants in the region. Slowing economic growth in China, the second-biggest importer of metallurgical coal, has increased chances of output cuts at mills and further shrinkage in demand for the fuel.
"Steel demand in Europe is very weak and consumption has slowed dramatically in recent months,' said Tim Cahill, an analyst at J&E Davy Holdings Ltd. in Dublin. "It'll get worse in the second half as government spending slows and banks stop lending to home buyers. Unless the U.S., Europe, China pump in serious stimulus, global steel demand will remain subdued.'
Full-year profit at BHP, slated to report earnings this month, may drop 24 percent to $17.9 billion, according to the average of 20 analyst estimates compiled by Bloomberg. Credit Suisse AG analysts, revising down commodity price forecasts, cut their full-year profit estimate for BHP by 7 percent, according to a July 12 note.
Analysts trimmed 2012 profit estimates for Rio on lower commodity prices and slowing growth. Rio today posted first-half net income of $5.9 billion, beating the $5.04 billion average of 11 estimates compiled by Bloomberg.