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Glencore Emerging A Big Winner From Coal Consolidation

Glencore Emerging A Big Winner From Coal Consolidation


The inconvenient truth of coal prices which refuse to fall as demanded by environmental activists and some investors and governments is proving to be a rather convenient fact for one of the world’s biggest mining and commodity trading companies, Glencore.

While other big miners have been selling coal assets Glencore has been buying and if recent indications are correct it now controls enough of the seaborne coal market to have a noticeable effect on price.

Bulk carriers are loaded with coal for export at the Australian port of Newcastle. Photographer: Brendon Thorne/Bloomberg

An example cited in a research report published this week was how Glencore was able to delay settlement in annual coal-price negotiations with Japanese buyers in order to win a higher price.

Macquarie, an Australian investment bank, said Glencore’s greatest influence was in top-grade thermal coal used to generate electricity rather than metallurgical, or coking coal used to make steel.

“Glencore’s increasing seaborne thermal coal-market control focuses on the trade’s top grade,” Macquarie said.

Delayed Settlement Earns A Higher Price

“The fact that Glencore was able to delay the annual settlement with the Japanese power utilities for four months this year, until spot (short-term) prices recovered, was a remarkable demonstration of market power”.

Ivan Glasenberg, billionaire and chief executive officer of Glencore Plc. Photographer: Simon Dawson/Bloomberg

With deep commodity-trading roots Glencore and its management team, led by Ivan Glasenberg, have never been afraid of taking controversial positions or in doing business in countries that other mining companies avoid.

The cobalt trade in the Democratic Republic of Congo is a sector avoided by most miners, as is trading in copper mined in Congo.

Coal, however, is in another league with deals measured in the billions of dollars, not just millions.

What’s becoming particularly interesting is trying to judge whether Glencore has backed a winner while rivals such as BHP and Rio Tinto, have sold too soon in order to placate environmentally-conscience investors and increasingly vocal activists.

While impossible to accurately compare the diversified miners because they have different specialties it is interesting to look at share-price movements over the past six weeks, a time which includes a sell-off and recovery by all four. BHP, as measured by its shares listed on the London Stock Exchange, is up 4.6%. Rio Tinto is up 4.1%, and Glencore is up 8.4%.

Glencore Consolidates In An Unpopular Industry

“As major diversified miners withdraw from thermal coal, Glencore has stepped into the breach, busily consolidating its position in an unpopular sector of the mining industry,” Macquarie said.

“Glencore is now the world’s largest producer and exporter of seaborne thermal coal.”

A stacker-reclaimer operates next to stockpiles of coal at the Newcastle Coal Terminal in Australia: Brendon Thorne/Bloomberg

Macquarie estimates that Glencore controls around 12% of the seaborne thermal coal market, which is relatively modest compared with BHP’s 22% of the seaborne metallurgical coal market,

But where Glencore has a major position is in the highest-quality coal which is in increasing demand because it generates more heat and is less polluting. In that segment Glencore has an estimated 35% market share, giving it “considerable price influence in the Pacific basin,” Macquarie said.

Another reason for coal reclaiming headlines as an investment rather than as an environmental target is a plan by the Texas-based private equity business, Energy and Minerals Group, to raise $1 billion through an initial public offering and listing on the Australian Stock Exchange (ASX) later this month.

Energy and Minerals controls Coronado Coal which late last year acquired the Curragh coal mine in the Australian State of Queensland for a reported $539 million.

Coranado is scheduled to list on the ASX on October 23 in what is being described as the biggest coal float in Australia in seven years.

 



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