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Seaport downgrades Warrior Met Coal to 'neutral' amid uncertain demand

Seaport Global Securities LLC analysts downgraded Warrior Met Coal Inc. from "buy" to "neutral," citing the company's increased stock price, a projected rise in global metallurgical coal supply and uncertainties surrounding Chinese demand.

"Given the big move in Warrior's equity since the IPO, a lot of supply coming online around the world and so much uncertainty in China (even beyond the impending 30% reduction in coke production and 50% steel capacity cut from November 17 until mid-March of next year), we think risk/reward is at best equal and not enough to justify a buy rating," analysts Mark Levin and Nathan Martin said in an Oct. 18 note.

Warrior's stock price has risen 27% since its IPO of $19 per share in April.

Taking into account the challenges Warrior has faced in outperforming the S&P 500 during metallurgical price corrections of 20% or more and the estimated 20 million to 30 million tons of incremental metallurgical coal supply coming online in 2018, Seaport assumes that "met prices could continue to retrace and make it tough for Warrior to outperform."

Seaport underscored the anticipated increase in global supply amid a "very uncertain demand environment," which it largely attributed to Chinese policy. In a recent note, Levin said that unless a significant supply disruption occurs, the metallurgical coal price rally of 2017 will "likely peter out in 2018, particularly as Chinese import demand slows off its torrent 2017 pace."

"Again, Warrior is 100% exposed to met coal. In short, it's hard to be bullish on Warrior unless one is bullish on met coal prices rising from their current spot level of ~$180/tonne, something we view as unlikely unless there is some unexpected supply event," Levin and Martin said.