Glencore Profit on Coal Arbitrage Hurt by Stagnant Ship Rates

Stagnant charter rates for ships curbed Glencore International Plc’s profit last year from buying coal and shipping the commodity elsewhere for sale at a higher price, known as arbitrage.

The marketing-activities margin at its energy-products unit narrowed to 0.4 percent from 1 percent in 2011, Glencore, the world’s biggest publicly traded commodities supplier, said today as it reported annual earnings. The figure applies to adjusted earnings before interest, taxes, depreciation and amortization.

A lack of volatility in freight rates that stayed low last year hindered arbitrage opportunities for coal, hurting margins and divisional third-party sales, said Tor Peterson, Glencore’s director of coal and coke. Average hire rates for Panamax ships as gauged by the Baltic Exchange in London were the lowest last year for data going back to 1999.

“The freight is a big factor,” Peterson said on a conference call today. Baar, Switzerland-based Glencore wanted to avoid taking any extra risk for narrower margins, he said.

Panamax charter costs slumped last year as the fleet expanded by a record, averaging $7,684 daily, according to the exchange, which assesses freight costs. A total of 369 new Panamaxes left shipyards and entered service last year, the most in records going back to 1970, according to London-based Clarkson Plc, the biggest shipbroker.

Coal Production

The energy-products division sold 78.3 million metric tons of power-station coal in 2012, down from 91 million tons in 2011, according to Glencore’s statement. The company’s own production of the fuel climbed to 41.8 million tons from 20.5 million tons in the prior year.

Glencore also said tankers hired under longer-duration accords to carry crude oil and refined products for itself and customers “continued to provide headwinds during 2012.”

“However, as we look at 2013, light can be seen at the end of this tunnel,” the company said, adding that its exposure to hires for longer periods was declining.

The commodities trader had a fleet of 203 ships as of the end of 2010, including 176 chartered vessels, and its shipping division lost money that year and in 2009, according to a prospectus for Glencore’s initial public offering in 2011. Net income excluding significant items dropped 25 percent to $3.06 billion last year, the company said today.

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