Glencore, Xstrata Deal Set to Squeeze Japan Coal Post-Fukushima

Glencore International Plc’s agreed takeover of Xstrata Plc (XTA), making it the world’s biggest thermal coal exporter, poses a new threat to Japanese utilities forced to buy more of the fuel after the Fukushima nuclear disaster.

Glencore, the world’s largest publicly traded commodities supplier, produces about 20 million metric tons of power station coal a year and would boost output fivefold through an acquisition of Xstrata. Japan’s thermal coal imports will probably rise 3 percent to 104 million tons in 2012, according to Daiwa Capital Markets.

“The coal market will likely tighten because the merger accelerates market domination by suppliers,” Hidetoshi Shioda, a senior analyst at SMBC Nikko Securities Inc., said by phone. “Japan will increase coal imports because of energy issues after the Fukushima accident.”

The top five thermal coal exporters led by the combined company would have about 30 percent of the global market after the deal, according to UBS AG. Japanese power companies, the world’s second-biggest buyers of thermal coal, are forecast to pay near record prices for imports from Australia again this year as the Asian nation shifts away from nuclear energy following the Fukushima accident last March, the worst since Chernobyl in 1986.

“Fewer suppliers through mergers and acquisition activities may oligopolize the market,” Yuuki Sakurai, chief executive officer at Fukoku Capital Management Inc. in Tokyo which manages the equivalent of $20 billion, said by phone. There’s a “possibility that the negotiation power of the utilities will weaken,” he said.

Russian Supply

The impact on European coal markets, where the U.K. and Germany are the biggest importers, may be more limited because of the range of suppliers, Nigel Yaxley, a U.K.-based independent industry consultant said. Russia, a country where neither Xstrata nor Glencore have mines, is the biggest supplier of coal to the European Union.

“I don’t see it as a big deal at all because of the liquidity in coal markets,” Yaxley said in a telephone interview today. “There’s coal from Russia, the U.S., Colombia and South Africa.”

China Impact

The merger will have little impact on coal imports into China because purchases are based on the price rather than the quality of the commodity, said Zhao Guodong, a Beijing-based spokesman at China Coal Technology and Engineering Group. Chinese consumers would seek supplies from local producers should prices gain, overcoming transportation hurdles, he said.

The effect on Indian companies, too, would be minimal, said Narendra Nath Misra, director at NTPC Ltd., India’s largest thermal power generator accounting for more than one-third of the nation’s total coal imports.

“Our imports are very little compared with other countries,” Misra said today by phone. “I don’t foresee any cost increase for NTPC after this takeover.”

Glencore, which has 34 percent of Xstrata, offered 2.8 new shares for each Xstrata share in an agreed takeover, the biggest mining deal. Combined the companies will have 2012 sales of $209 billion, they said today.

Australian Coal

Japan’s contract prices for thermal coal from Australia for the year starting April 1 may be $120 a ton, Daiwa said. That would be 71 percent higher than the 10-year average for spot sales of coal from Australia, according to data from IHS McCloskey Group Ltd. The contract price reached a record $130 a ton last year.

Japan, which relied on nuclear energy for about 30 percent of its power needs, now only has three of its 54 reactors operating. The nation is running its thermal coal plants at almost 100 percent because the fuel is the cheapest after uranium and it’s building new coal-fired power stations. Chugoku Electric Power Co. and Kyushu Electric Power Co. are among companies building or planning to build plants.

A Glencore-Xstrata combination would create a rival to BHP Billiton Ltd., the world’s biggest mining company. It would be the world’s biggest producer of zinc, lead and thermal coal and a top-five producer of copper and nickel, according to UBS.

South Africa

Buying Xstrata will give Glencore control of coal mines in Australia, Colombia, South Africa and Canada. Glencore, which describes itself as “a market leader” in coal marketing on its website, also buys thermal coal from other companies. Xstrata’s operations and Glencore’s marketing unit will operate under their existing brands, Glencore said today.

“If they merge and become an even bigger player in the market, it will probably have some effect,” Tetsuya Umehara, a deputy director of the coal division of Japan’s Ministry of Economy, Trade and Industry coal division, said by phone. “We are still watching the effects of the possible merger. The coal market is already” controlled by a small number of companies, he said.

Tokyo Electric Power Co. is running only one of its 17 nuclear reactors after the March 11 earthquake and tsunami wrecked its Fukushima Dai-Ichi plant. It boosted consumption of coal by 24 percent in December, alongside a threefold gain in fuel oil and a sevenfold gain in crude oil.

Taichi Okazaki, a spokesman for the company, declined to comment on the merger. Chubu Electric Power Co. spokesman Akio Miyazaki and Electric Power Development Co. spokesman Hiroshi Nakatani also declined to comment.

Energy Costs

Nuclear energy costs were estimated to be at least 8.9 yen (12 cents) per kilowatt-hour while coal, liquefied natural gas and oil were calculated at 9.5 yen, 10.7 yen and 36 yen, respectively, a government panel said in December.

Japan, which imports almost all its coal, has boosted purchases 80 percent since 1990 and accounts for about 15 percent of the world’s total coal trade, according to a Jan. 16 report by Enerdata. About 65 percent of its coal comes from Australia.

“Japanese demand has also improved as coal burn from the Japanese power utilities is now above 2010 levels,” Macquarie Group Ltd. analysts led by Colin Hamilton said in a Jan. 18 report.

Global seaborne demand for thermal coal may gain 22 percent by 2016 to 947 million tons from last year, Macquarie estimated. The market may swing from a balance last year to a deficit in 2016 with demand increasing 30 percent to 1 billion tons.

Electricity from coal-fired plants may rise 63 percent to 13,000 terawatt-hours by 2035, the International Energy Agency said in November. Global atomic capacity may drop 15 percent by 2035, spurring investment in coal-fired plants, it said.

Mining takeovers are accelerating as companies struggle to replace depleting deposits and China’s industrial growth stokes demand for metals.

“Pricing power will shift into mining companies as they accelerate domination in the market,” Tatsufumi Okoshi, senior economist at Nomura Securities Co., said by phone. “Suppliers may gain pricing power in the second half of this year to next year, when the European debt crisis calms down and economies recover.”

To contact the reporters on this story: Masumi Suga in Tokyo at msuga@bloomberg.net; Tsuyoshi Inajima in Tokyo at tinajima@bloomberg.net

To contact the editors responsible for this story: Rebecca Keenan at rkeenan5@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net

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