Coal news and updates

Ivan Glasenberg, the billionaire running commodities supplier Glencore Xstrata Plc, is investing more in thermal coal than his three closest competitors combined even as investors warn the fuel’s outlook is deteriorating.

The former coal trader is betting on prices rebounding from a three-year drop. The Swiss company, in which he owns 8 percent, is spending $4.75 billion to boost output 21 percent through 2016. At the same time, BHP Billiton Ltd. (BHP), the biggest mining company, Rio Tinto Group and Anglo American Plc, have stalled new investments, sold mines or halted some production.Glasenberg, 56, is deepening his bet on coal as appetite wanes among some investors for companies that extract fuels blamed for making the biggest contribution to climate change. Share prices of the four largest single-commodity thermal-coal producers have tumbled an average 25 percent in the past 12 months as an explosion in lower-cost supplies of U.S. shale gas compounds a weaker outlook for exports to China.

“This is a classic counter-cyclical acquisitive strategy that Ivan Glasenberg has made his name in,” said Paul Gait, a mining analyst in London at Sanford C. Bernstein Ltd. who rates Glencore outperform. “Everybody is bearish thermal coal.”

Competitors are “running their business according to a balance-sheet constraint that is either to preserve capital and credit ratings rather than a desire to maximize value,” Gait said. “That creates opportunities.”

Coal Export Forecast

Glencore paid Rio about $500 million for 25 percent of Australia’s third-biggest thermal-coal mine in October, five months after completing the takeover of Xstrata Plc for $29 billion to gain control of the fuel’s biggest exporter. The Xstrata deal bolstered reserves eightfold to almost 4 billion tons amid a global supply glut.

Spokesmen for BHP, Rio and Glencore declined to comment for this story.

Glencore, based in Baar, forecasts that demand for coal exports will rise 12 percent by 2016 from this year and has a “positive medium-term market outlook” as less profitable mines close, removing supply. That view conflicts with the position of BHP Chief Executive Officer Andrew Mackenzie, who said in October the company had halted spending on new mines.

“We’re not investing in thermal coal at the moment,” Mackenzie said, adding the Melbourne-based company isn’t planning to sell coal assets. “The message in thermal coal is to maximize returns with what we’ve got.”

Chinese Demand

As Glasenberg remains bullish, Bank of America Merrill Lynch said in a Nov. 26 report that supplies are increasing to an already oversupplied seaborne market. Colombian exports may rebound from current disruptions, Australia and Indonesia are slow to curb production, demand from China is restrained, and Indian imports may be limited by currency depreciation, the bank said, lowering its forecast for 2015 prices by 10 percent.

Citigroup Inc. last month said it sees a surplus persisting next year as producers fail to curtail shipments and Chinese inventories increase.

“Should miners increase their exposure to coal? In general I shouldn’t think so,” said Erik Jan Stork, senior sustainability specialist at APG Asset Management in Amsterdam, which manages about $450 billion in pension assets. “In the long-term, we expect that coal will be under increasing pressure.”

China, whose largest cities had poor air quality on an average 48 percent of the days in October, is seeking to cut its use of coal. China aims to reduce the share of coal in energy consumption to below 65 percent by 2017 from about 70 percent now.

Newcastle Prices

Prices for thermal coal shipped from Newcastle in Australia, an Asian benchmark, have slumped about 8 percent this year, headed for a third straight annual decline.

U.S. producer Patriot Coal Corp. (PCXCQ) filed for bankruptcy last year, while Arch Coal Inc. has dropped 73 percent and Peabody Energy Corp. 52 percent over the past two years. China Shenhua Energy Co., that nation’s biggest producer, is down 23 percent over the same period, while Indonesia’s biggest exporter PT Bumi Resources is off about 86 percent.

“If a company feels that it wants to increase its exposure to thermal coal, we need to understand why,” said Craig Mackenzie, investment director and head of sustainability at Scottish Widows Investment Partnership, which manages 145 billion pounds in assets. “I haven’t yet heard a convincing case why it’s a good idea.”

Coal for Steel

Even so, Glencore is spending $2.6 billion expanding two Australian coal operations as part of plans to boost annual production to 160 million tons by 2016 from 132 million tons last year. The expansion includes coking coal, used to make steel. It also spent $550 million this year on a coal port in Colombia and $1.1 billion on a South African mine.

Glencore’s shares have lost about 34 percent since the Xstrata deal was announced, in line with the FTSE All-Share Mining index’s drop in the period.

Glasenberg’s bet on coal is underpinned by the company’s view that demand will rise in China, India, Vietnam and Turkey. An estimated 1,600 new coal-fired power plants in 59 countries are expected to come online by 2020, Glencore’s head of coal Tor Peterson said in London in September. Still, 30 percent of world production is unprofitable at current prices because of a supply glut and the market will be “difficult” for the next six to nine months, he said.

Anglo American has committed funds to the development of the Cerrejon thermal-coal mine in Colombia, which it owns with Glencore and BHP. “Phase one” expansion is set to cost each company about $500 million.

Anglo American

Anglo is also studying two new thermal coal projects in South Africa that would add 14.1 million tons a year to production. The company says capex for the New Largo and Elders projects has yet to be determined. Deutsche Bank Group AG estimates they could cost $2 billion and $450 million, respectively.

Coal remains a “good story,” with demand from China and India estimated to grow almost 4 percent a year through to 2020, Godfrey Gomwe, head of Anglo’s thermal coal unit, said in e-mailed comments.

Aside from Cerrejon, BHP’s only other thermal coal investment is $367 million to expand its Newcastle Port in Australia. Rio has no large capex planned for its thermal coal projects.

While a global agreement on climate change may be some way off, regional polices to tackle local pollution and air quality are already undermining demand for coal, according to Scottish Widow’s Mackenzie and APG’s Stork.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore Xstrata.

 

 

Source: Bloomberg