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Glencore’s billionaire boss bets on coal rebound with Xstrata

Firat Kayakiran

Glencore International’s chief executive, Ivan Glasenberg, who built a $6 billion (R50bn) fortune trading bulk commodities, anticipates a rebound in coal prices from a 31-month low to justify his $33bn bid for Swiss mining house Xstrata.

Ivan Glasenberg, chief executive officer of Glencore International Plc, speaks during a conference session on day two of the Saint Petersburg International Economic Forum 2012 (SPIEF) in Saint Petersburg, Russia, on Friday, June 22, 2012. Russia's showcase investment conference, a three-day event, features foreign executives from global companies, including Citigroup Inc., Goldman Sachs Group Inc., and Siemens AG. Photographer: Andrey Rudakov/Bloomberg *** Local Caption *** Ivan Glasenberg. Credit: Bloomberg

Xstrata, the largest exporter of coal burned by power stations, recommended Glencore’s sweetened offer this week after initial opposition from some shareholders. The fuel accounted for 24 percent of Xstrata’s 2011 sales.

Glasenberg’s quest for Xstrata follows a 24 percent plunge in coal prices in the past year, caused in part by the US shale gas revolution. The combined group will have interests in 35 coal mines in Colombia, Africa and Australia, and account for about 10 percent of global seaborne exports, putting Glasenberg’s reputation for well-timed deals on the line.

“The timing of this merger for Glencore is probably very good,” Jefferies Group analyst Christopher LaFemina said. “Buying Xstrata in a period when coal margins are nearing a cyclical trough is smart.”

The bet on coal by Glasenberg was based on assumptions that would underpin a coal price recovery, analysts said. One was that the explosion of natural gas production from shale in the US would not be seen anytime soon in other nations, where it likewise might send prices plunging for gas, the main alternative to coal in power generation.

The acquisition of Xstrata, which would be the largest takeover of 2012, would be cleared in December, the firms have said. Xstrata’s support for the deal brings Glasenberg another step closer to a transaction that has been five years in the making. The one-time coal trader is Glencore’s largest shareholder, with a 16 percent stake valued at £3.8bn (R51bn) at Wednesday’s share price.

Glencore declined to comment on this story.

Coal at the Australian port of Newcastle slumped to $81.15 a ton on July 20, the lowest since December 2009, according to data from IHS McCloskey.

Thermal coal margins were set to improve in the next three years as producers responded to lower prices by shutting operations, LaFemina said.

“It’s not a good environment to develop a coal mine now. Supply will get constrained and demand will recover.”

Prices would rebound to average $100 a ton this year and remain in that range during the next two years, according to Macquarie estimates.

The Glencore deal “is a bet” on coal, said Macquarie analyst Jeff Largey. Glencore was well positioned through its marketing and trading groups to lift coal margins because of its ability to match buyers and sellers and blend different grades.

“Glencore must be assuming, as we do, that coal remains key to the energy mix for decades,” Largey said. “Coal still accounts for about 80 percent of the energy production in China and 45 percent in Japan and coal will remain the baseload for Japan even as it moves away from nuclear, so globally it’s not possible to get away from coal.”

Glasenberg is not the only billionaire betting on coal. Evraz, the Russian steel maker part-owned by billionaire Roman Abramovich, said yesterday that it had agreed to raise its stake in coal producer Raspadskaya to 82 percent by buying out management.

Power plants worldwide would increase their use of coal by an average 2.3 percent a year from 2009 to 2035, the International Energy Association (IEA) said last year, basing the forecast on current energy policies. That was a higher growth rate than the IEA predicted for gas, hydroelectric or nuclear in the period, while oil use was forecast to fall.

The resulting collapse in US coal prices and demand has led to tens of millions of tons of coal production cuts in the US this year. Another consequence has been a 58 percent jump in US coal exports to 24.5 million tons in the first half of 2012, Barclays said last month. Prices have correspondingly fallen in Europe and Asia.

“A problem in the seaborne thermal coal market is that low shale gas prices push US coal to the export market and thus cap the price,” LaFemina said.

Colombian coal was already being shipped to European customers after some US customers switched to gas, said analyst Paul Gait. About 5 billion cubic feet a day of coal-to-gas switching for power generation in the US has helped increase US coal exports to Europe by 72 percent since 2010.

“The US is really the tail of the dog,” said analyst David Beard, explaining that the world turned to North America when there were supply disruptions elsewhere.

Xstrata produced 72.4 million tons of coal used to generate electricity in 2011, mostly from Australian and South African mines and sold in Asia. It mined 12.9 million tons of metallurgical coal used to make steel. The price for that type of coal has also slumped this year as Chinese demand slowed.

Glencore, which has coal mines in Colombia and South Africa, sold 91 million tons of thermal coal and 4 million tons of metallurgical coal in 2011. The firm holds a 34 percent stake in Xstrata and has an agreement to trade the other company’s coal exports.

Glasenberg raised Glencore’s offer to 3.05 shares for each Xstrata share last month from an original ratio announced in February of 2.8. The move came after Qatar Holding, the nation’s sovereign wealth fund and Xstrata’s largest shareholder after Glencore, said the first bid was too low.

Combining the two Swiss businesses would create the world’s fourth-largest mining company. Glencore would also get Xstrata’s copper and zinc mines, creating a group with 130 000 staff in 40 nations.

The shale gas revolution that has upended the US energy scene may not be repeated in other major economies.

The gas industry faces opposition in Europe over the environmental impact of fracking.

While China may have large shale gas reserves, the infrastructure such as pipelines and processing plants required to tap that wealth in remote regions had not been developed yet, Doyle Trading Consultants analyst Gordon Howald said. “The US built the shale gas industry in three to four years.”

“That’s not going to happen in China; it’ll be 10 to 20 years if at all.” – Bloomberg

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