London - Glencore needs its commodities-trading division to help offset a slowdown at its mining unit as the rout in raw-material prices deepens, according to Standard & Poor’s.
“Do we see some significant stresses on the mining business, has the marketing business slightly underperformed in first half 2015? Well yes it did,” Simon Redmond, director of corporate ratings for commodities at S&P, said in a Bloomberg Television interview Tuesday. “If that marketing business continues to not be a bit of an offset for the mining business, we may take a slightly different view.”
S&P has a BBB rating, the second-lowest investment grade, with a negative outlook on Glencore, while Moody’s Investor Service in December cut the Swiss firm’s credit rating to the lowest investment level. Glencore’s trading unit contributed about three quarters of the company’s adjusted earnings before interest and tax in the first half of 2015.
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The commodity rout has eroded profits for the biggest miners and forced them to do more to protect their credit ratings. Glencore, run by billionaire Ivan Glasenberg, has scrapped dividend payments, sold new shares and flagged asset sales to help cut its $30 billion debt load. It said in December that it plans to reduce debt to as low as $18 billion by the end of this year.
“They’ve got the mining business, they’ve got all the woes there, but the marketing business in principle should be a bit more stable through the cycle,” Redmond said.
Glencore shares have dropped 69 percent in London in the past year, valuing the company at about $17.5 billion. The Bloomberg Commodity Index, a measure of returns for 22 raw materials, reached the lowest since at least 1991 last month after a slowdown in biggest user China led to oversupplies.
The plunge has led to a a raft of downgrades for miners. BHP Billiton, the biggest producer, this week had its rating lowered one step by S&P to A, a level unseen since 2003. S&P said action on capital expenditure and dividends will dictate whether a further reduction is warranted.
** Peter Grauer, the chairman of Bloomberg, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
-With assistance from Jesse Riseborough.
BLOOMBERG