Jesse Riseborough London
IVAN Glasenberg, the billionaire chief executive of Glencore, has argued his two biggest rivals have got it wrong by feeding a global glut of iron ore.
The world’s largest producers, including BHP Billiton and Rio Tinto Group, are fuelling a 25 percent increase in output, and “that’s what’s killing the super cycle”, Glasenberg said two months ago in London.
That criticism is cold comfort for coal producers suffering as Glencore, the biggest exporter of the power station fuel, raises output even as prices dipped to the lowest in five years last week.
“There’s a tension there and that certainly provides ammunition for those that would say ‘look, this is simply talk, not walk,’” said Paul Gait, an analyst at Sanford C Bernstein.
Glencore’s coal output increased 5 percent in the first half from a year ago and production this year will be 14 percent higher than 2012, according to a September 29 presentation by the company to analysts.
While BHP and Rio have defended plans to expand mines, ports and railways in Australia, Glasenberg believes the strategy is flawed as it deepens a price slump and erodes profit margins. His heightened criticism has coincided with Glencore’s proposed $160 billion (R1.7 trillion) combination with Rio, the second-largest exporter, that was rejected two months ago.
Last year, Glasenberg said rival mining chiefs had “screwed up” by swamping the world with raw materials that had eroded prices and profits.
Speaking in London on the day BHP announced a $2bn investment to boost Australian iron-ore output, the 30-year veteran of the commodities trade voiced concern over the plan.
This month he reiterated that view. “If you look at the statement put out today by BHP Billiton, one of the world’s biggest iron ore producers, saying they are going to expand production – it has already had an impact on prices,” Glasenberg said on October 6, according to the Wall Street Journal.
Glencore was seeking to bring “discipline” to its coal operations, it said. “We have consistently told the market that part of the problem with oversupply in coal has been due to legacy capex commitments that we inherited with the takeover of Xstrata, which we could not cancel. Part of the logic of our acquisition of Xstrata was to reintroduce capital discipline.”
Iron ore has slumped 40 percent this year. Rio said on October 15 its project to expand annual iron ore production capa- city in Australia by 24 percent to 360 million tons was “poised to generate significant value for shareholders”.
BHP has a similar goal, according to marketing head Arnoud Balhuizen, who said that it was still “extremely value-creative” to invest in iron ore.
“I’ll leave you to draw your own conclusions,” BHP chief Andrew Mackenzie said in response to a question on whether Glencore’s view on iron ore was contradicted by the company’s coal-output expansion. “We believe in free markets. We believe in being the lowest cost producer.”
Glasenberg last year doubled down on the power station fuel, betting on rising world demand as he completed the $29bn takeover of Xstrata. That gave Glencore an interest in more than 35 coal mines in Colombia, Africa and Australia.
Still, Glasenberg had also shuttered mines in a bid to partly offset the impact of new production, said Gait. The company last month suspended operations at Ravensworth in Australia, citing lower prices and higher costs.
“We’ve seen Glencore close thermal coal mines and cut thermal coal capacity so to its defence, I’d say that they’ve done a better job of it,” he said.
Four months after completing the Xstrata takeover, Glencore told investors in September last year that about 30 percent of seaborne coal was being sold at a loss. That had increased to more than 40 percent, Macquarie Group said in a presentation last month.
That is hurting Glencore’s bottom line. Adjusted earnings before interest and tax from its energy products marketing unit, which includes coal trading, fell 55 percent in the first half from a year earlier. The company cited “challenging” and “oversupplied” coal markets for the slump.
The price of energy coal from Australia’s Newcastle Port, a benchmark for Asia, has plunged about 25 percent this year to $63.30 a ton last week, the lowest since 2009, according to McCloskey.
“The spot thermal coal price could test the $60 a ton level over the next three to six months,” Deutsche Bank analysts wrote in an October 10 note. A drop below $60 a ton “would catalyse the much-needed production shuts to stabilise the market”.
Glencore shares fell 1.55 percent on the JSE to close at R55.80 on Friday.
With freight contracts at some mines in Australia, the second-biggest exporter of energy coal, making it cheaper to ship at a loss rather than close, producers are helping to prolong a supply glut.
Macquarie analyst Stefan Ljubisavljevic said Glencore planned to increase output in Australia by 10 million tons from 2015 to 2018, more than any of its rivals . BHP and Rio do not figure in the bank’s analysis of new Australian supply.
Glencore estimates production, including coking coal, would climb to 168 million tons this year, analysts visiting the Australian coal mines last month posted on its website. That was up from 157 million tons last year.
While output from its mines in South Africa and Colombia is set to fall this year, production in Australia is estimated to rise 16 percent this year to 94 million tons at operations acquired from Xstrata. The firm forecast thermal coal demand growth at 5 percent a year and a slowing of supply growth, it said. It predicts a deficit in global production next year.
Ben Davis, an analyst at Liberum Capital, said: “While Glencore is contributing to continued weakness in thermal coal prices by bringing on new supply, those projects were in progress and they’ve delayed others that were in earlier stages. BHP and Rio are guilty of bringing on destructive new supply whereas Glencore expected to meet demand.” – Bloomberg