Quest for Xstrata follows coal-price fall
Glencore’s CEO is betting on better prices while eyeing Xstrata, writes Firat Kayakiran
GLENCORE’s Ivan Glasenberg, who built a $6bn fortune trading bulk commodities, expects a rebound in coal prices from a 31-month low to justify his $33bn bid for Xstrata.
Xstrata, the world’s largest exporter of coal burned by power stations, this week recommended Glencore’s sweetened offer after initial opposition from shareholders. Coal accounted for 24% of Xstrata’s sales last year.
Mr Glasenberg’s quest for Xstrata follows a 24% plunge in coal prices in the past year, caused in part by the US shale gas revolution. The combined company will have interests in about 35 coal mines in Colombia, Africa and Australia, and account for about 10% of global seaborne exports, putting Mr Glasenberg’s reputation for well-timed deals on the line.
“The timing of this merger for Glencore is probably very good,” Christopher LaFemina, an analyst at Jefferies Group, said in an interview. “Buying Xstrata during a period when coal margins are nearing a cyclical trough is smart.”
The bet on coal by Mr Glasen- berg, Glencore’s CEO, is based on assumptions that would underpin a coal price recovery, analysts say. One is that the explosion of natural gas from shale in the US won’t be seen anytime soon in other nations, where it likewise may send prices plunging for gas, the main alternative to coal in power generation.
The acquisition of Xstrata, which would be the largest takeover this year, is expected to be cleared by December 31, the companies have said. Xstrata’s support for the deal brings Mr Glasenberg another step closer to a transaction that’s been five years in the making. The onetime coal trader is Glencore’s largest shareholder, with a 16% stake valued at about £3.8bn.
Thermal coal margins are set to improve in the next two to three years as producers respond to lower prices by shutting operations, Mr LaFemina says. “It’s not a good environment to develop a coal mine now. Supply will get constrained and demand will recover.”
Prices will rebound to average $100 a ton this year and remain in that range during the next two years, according to Macquarie Group estimates.
The Glencore deal “is a bet” on coal, says Jeff Largey, analyst at Macquarie Group in London. Glencore is well positioned through its marketing and trading businesses to increase coal margins because of its ability to match buyers and sellers and blend different grades, he said in an interview.
“Glencore must be assuming, as we do, that coal remains key to the energy mix for decades,” Mr Largey says. “Coal still accounts for about 80% of the energy production in China and 45% 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.”
Mr Glasenberg is not the only billionaire betting on coal. Evraz, a Russian steel producer, said yesterday it agreed to raise its stake in coal producer Raspadskaya to 82% by buying out management.
Power plants worldwide will increase their use of coal by an average 2.3% a year from 2009 to 2035, the International Energy Association said last year, basing the forecast on current energy policies. That was a higher growth rate than the association predicted for gas, hydroelectric or nuclear in the period, while oil use was forecast to fall.
Xstrata produced 72.4-million tons of coal used to generate electricity last year, mostly from Australian and South African mines and sold in Asia, according to Bloomberg data.
Glencore, which has coal mines in Colombia and SA, sold 91-million tons of thermal coal and 4-million tons of metallurgical coal last year. The Baar, Switzerland-based company holds a 34% stake in Xstrata and has an agreement to trade the other company’s coal exports.
Mr Glasenberg started his commodities career in 1984 on the coal desk of Marc Rich. He became head of the firm’s coal unit in Switzerland in 1991. By 1994, he was part of the management team that bought out the company and changed its name to Glencore. Bloomberg