Glencore’s Coal Hedge Gets More Painful as Prices Rally

October 19, 2016, 10:48 am | Admin

The rally in thermal coal is taking a bigger bite out of Glencore Plc’s profits after the world’s biggest exporter of the fuel locked in prices prior to the surge.

The Swiss company reported a $395 million mark-to-market non-cash loss in the first half on hedges for future sales, which applied to the equivalent of about half its annual production.

Coal prices kept climbing — meaning Glencore is forgoing even more potential profits — and Liberum Capital Ltd. analysts estimated in a report on Monday that loss on the hedge could be as much as $1.2 billion. A benchmark for prices in Asia has risen 53 percent since the end of June and traded at the highest in more than three years last week.

Prices for the fuel have surged this year after a surprise change in Chinese government policy that lowered domestic production. As a result, steel mills and power plants in China increased coal imports since April, boosting prices.

Coal prices may start declining after Chinese policymakers decided to temporarily reverse limits on thermal-coal production until December, Liberum analyst Ben Davis wrote in a report on Monday.

“We expect the hedging loss to shrink as thermal-coal prices drop faster than what is currently being implied by the forward curve,” he said.

Glencore’s Chief Financial Officer Steve Kalmin described the hedges in August as an “opportunity cost.”

“We’ll still be ahead because there’s still a lot of unsold tonnage,” he said at the time. A spokesman for the company declined to comment further on Monday.

Glencore has been working to slash its debt load after its share price collapsed last year. The move to hedge about 55 million metric tons of output was a “corporate risk-management” decision, the company said in August.

It produced 59 million tons of coal in the first half from mines in Australia, Colombia and South Africa. Glencore expects the forward sales to be settled by the end of June.

The rising cost of the hedge hasn’t slowed Glencore shares, which soared 154 percent this year as coal and zinc prices increased. Analysts at Investec Plc raised the stock to hold from sell on Monday and almost doubled their target price to 244 pence.

Glencore shares advanced 0.7 percent today to 229.9 pence, valuing the company at about $40 billion.

“Coal is the hottest commodity in town today and we have a trading view that over the next six months it remains well supported,” James McGeoch of Citigroup Inc. wrote in a note to clients on Monday. Glencore will produce about 125 million tons this year and “these tons are going up in value every day,” he said.

The price of thermal coal from Australia’s Newcastle port, a benchmark for Asia, reached its highest in more than three years on Friday, trading at $87.30 a ton. That compares with $48.50 in April.

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

http://www.bloomberg.com/news/articles/2016-10-17/glencore-s-coal-hedge-gets-more-painful-as-prices-keep-rallying

Last modified on February 1, 2017, 10:49 am | 3717