David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

(Updated )

Everyone loves the comeback kid, and they don't come much comeback-ier than Glencore.

The commodities trader had a market capitalization north of $55 billion in May before plummeting to less than $15 billion in September. It was still languishing at those levels in late January when the current bull market in mining stocks sent it soaring. At its last close before annual results were announced Tuesday morning, the stock had gained 87 percent in just five-and-a-half weeks.

Back From the Dead
Share price performance for members of FTSE 350 Mining Index from Jan. 1 to Feb. 29
Source: Bloomberg data

That's all very nice, but what does Glencore do for an encore? Chief Executive Officer Ivan Glasenberg has shown steely discipline in pulling $8.7 billion of debt and costs out of the business, with another $13 billion-odd promised, but Glencore's enterprise value is now about 8.6 times its forecast Ebitda for the next 12 months. That's well above the 7.3 times multiple accorded to BHP Billiton or the 7.4 for Rio Tinto -- or, for that matter, the average 8.4 times Glencore has traded on since its 2011 initial public offering. 

Sooner or later, investors will want to see the company throwing off more cash. Glencore's trading business stands a good chance of doing just that -- Ebitda in the marketing divisions was down just 11 percent over the 2015 fiscal year, compared with a 38 percent slump in the industrial divisions which actually produce commodities. The problem is all that capital tied up in mines and processing plants.

Point of no Return
Returns on assets from Glencore's energy unit have been underperforming the pack
Source: Glencore 2015 preliminary results and 2014 and 2012 annual reports
Note: Measure shown is adjusted EBIT return on average net assets

The weak spot is pretty clear to see: Returns on net assets from Glencore's energy unit have been lackluster for two years now, and have never led the pack, despite the fact that the division accounts for about half of the company's revenue and 30 percent of net assets. Industrial activities at the unit lost $88 million in adjusted Ebit over the past year. That's basically coal mining -- Glencore has only a handful of oil well stakes in Africa and Russia despite trading vast volumes of the stuff.

As you'd expect from a company that claims to be the world's biggest exporter of thermal coal, Glencore is optimistic that market conditions are on the turn. Demand will continue to rise up to 2030, according to charts published in a company presentation in October. Demand for shipped thermal coal will increase about 13 percent between 2014 and 2017, according to a separate investor presentation in December 2014.

Paint It Black
Glencore's coal demand forecasts are looking too rosy
Source: Glencore December 2014 investor update; International Energy Agency 2015 medium-term coal market outlook
Note: All numbers forecasts or estimates except 2013. Glencore numbers are for seaborne thermal coal demand; IEA numbers are for seaborne thermal coal imports

The trouble is, Glencore is increasingly alone in that bullish forecast. The International Energy Agency's numbers suggest that shipped thermal coal demand will decline about 3.9 percent over the period, or by 8.9 percent based on an alternative scenario where China's coal demand has already peaked. Glencore's estimate for 2017 demand is about 20 percent higher than the IEA's China peak coal scenario.

BP is on the same page, forecasting in its latest energy outlook that thermal coal demand growth will slow to just a fifth of its recent pace. The commodity will account for less than 25 percent of primary energy generation by 2035,  BP projects -- the lowest share since the Industrial Revolution. Of the big miners, Glencore looks most exposed. Rio Tinto and Anglo American plan to sell their remaining thermal coal pits, while BHP focuses on the coking coal used in steelmaking, which has better demand prospects.

These might be considered purely long-term challenges. Mines last only a finite number of years anyway: If Glencore can run its coal pits profitably for a few years, who cares what happens in 2025?

What a Drag
Glencore's profit margins on select commodities, based on company's 2016 cost targets and spot prices
Source: Company reports, Bloomberg data

That's the problem, though. Even if Glencore manages to achieve the cost reductions it forecasts for this year, coal will be the least profitable of the company's major mined commodities. At a time when money is tight, every dollar invested in digging up the black stuff is a dollar that could be better spent on copper or zinc. The gravitational pull of all that capital dedicated to coal risks dragging down the performance of the company as a whole unless it starts making some changes.

Disclosure: Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Updates to add Peter Grauer's relationship with Glencore)

  1. The IEA produces forecasts only for every second year; the 2017 estimates of 944 million tons and 895 million tons (China peak coal scenario) are produced by averaging the forecasts for the 2016 and 2018 years.

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David Fickling in Sydney at

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Matthew Brooker at