Glencore International Plc’s Ivan Glasenberg, who built a $6 billion fortune trading bulk commodities, is anticipating a rebound in coal prices from a 31-month low to justify his $33 billion bid for Xstrata Plc.
Xstrata, the world’s largest exporter of coal burned by power stations, this week recommended Glencore’s sweetened offer after initial opposition from shareholders. The fuel accounted for 24 percent of Zug, Switzerland-based 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 U.S. shale gas revolution. The combined company will have interests in about 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,” Christopher LaFemina, an analyst at Jefferies Group Inc., said in an interview. “Buying Xstrata during a period when coal margins are nearing a cyclical trough is smart.”
The bet on coal by Glasenberg, 55, Glencore’s chief executive officer, is based on assumptions that would underpin a coal price recovery, analysts said. One is that the explosion of natural gas from shale in the U.S. 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 of 2012, is expected to be cleared by Dec. 31, the companies have said. Xstrata’s support for the deal brings Glasenberg another step closer to a transaction that’s been five years in the making. The one-time coal trader is Glencore’s largest shareholder, with a 16 percent stake valued at about 3.8 billion pounds ($6 billion) at yesterday’s share price.
Glencore declined to comment for this story.
Coal at the Australian port of Newcastle slumped to $81.15 a metric ton on July 20, the lowest since December 2009, according to data from IHS McCloskey.
Thermal coal margins are set to improve in the next two to three years as producers respond 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 will rebound to average $100 a ton this year and remain in that range during the next two years, according to Macquarie Group Ltd. estimates. Chinese miners may have idled output equivalent to as much as 300 million metric tons of capacity this year, or 7 percent of the national total, brokers including Mirae Asset Securities Co. and Sanford C. Bernstein & Co. said in August.
The Glencore deal “is a bet” on coal, said Jeff Largey, an 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,” 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 isn’t the only billionaire betting on coal. Evraz Plc, the Russian steelmaker part-owned by Roman Abramovich, said today it agreed to raise its indirect stake in coal producer OAO Raspadskaya to 82 percent by buying out management.
Power plants worldwide will increase their use of coal by an average 2.3 percent 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 IEA predicted for gas, hydroelectric or nuclear in the period, while oil use was forecast to fall.
In Germany, Europe’s largest electricity market, cheaper coal prices have made it more profitable to switch from burning gas. The so-called dark-spark spread for the next quarter widened to a record 22.75 euros on Sept. 21 and was at 22.67 euros on Oct. 2. Data began in October 2009 for the measure of profit from burning coal instead of gas.
Gas futures slumped to a decade-low in New York in April, helping to spur energy utilities to burn more of the fuel and rely less on coal. Power generation from U.S. gas-fired power plants matched output of coal-burning plants for the first time in April, according to the Energy Department in Washington.
The resulting collapse in U.S. coal prices and demand has led to tens of millions of tons of coal-production cuts in the U.S. this year.
Another consequence has been a jump in the nation’s coal exports, which were up 58 percent to 24.5 million tons in the first half of 2012, Barclays Plc said last month. Prices have correspondingly dropped in Europe and Asia.
“A problem in the seaborne thermal coal market is that low U.S. shale gas prices push U.S. coal to the export market and thus cap the price,” LaFemina said.
Colombian coal is already being shipped to European customers after some U.S. customers switched to gas, Paul Gait, an analyst at Bernstein in London, said in a phone interview. About 5 billion cubic feet a day of coal-to-gas switching for power generation in the U.S. has helped increase U.S. coal exports to Europe by 72 percent since 2010, Bernstein said in a report last month.
“The U.S. is really the tail of the dog,” said David Beard, an analyst at Iberia Capital Partners in New Orleans, explaining that the world turns to North America when there are 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, according to data compiled by Bloomberg. It also mined 12.9 million tons of metallurgical coal used to make steel. The price for that type of coal has also slumped this year after 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 Baar, Switzerland-based company holds a 34 percent stake in Xstrata and has an agreement to trade the other company’s coal exports.
Glasenberg last month raised Glencore’s offer to 3.05 shares for each Xstrata share from an original ratio announced in February of 2.8. The move came after Qatar Holding LLC, 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, the biggest publicly traded commodities supplier, would also get Xstrata’s copper and zinc mines, creating a group with 130,000 employees in more than 40 nations.
Glasenberg started his commodities career in 1984 on the coal desk of Marc Rich & Co., working in the coal departments in South Africa for three years and then in Australia for two. 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.
Gas prices have already rebounded 79 percent in trading in New York since touching the low on April 19, improving the attractiveness of thermal coal.
The shale gas revolution that has upended the U.S. 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 physical infrastructure such as pipelines and processing plants required to tap that wealth in remote regions hasn’t been developed yet, said Gordon Howald, a New York-based analyst at Doyle Trading Consultants.
“The U.S. built the shale gas industry in three to four years,” he said in an interview. “That’s not going to happen in China; it’ll be 10 to 20 years if at all.”