Thursday, December 11, 2014

Tighter coal market in sight – Glencore

JOHANNESBURG (miningweekly.com) – A natural tightening of the coal market as a result of demand catching up with supply will happen in the near future, says Glencore CoalCEO Peter Freyberg.
Freyberg, who was addressing Glencore’s investor day, made the point that coal is not in the same over-supply situation as iron-ore and that thermal coal is heading towards a supply deficit.
A graphic of consensus price forecasts, displayed during the investor day presentation, had coal in positive price territory in late 2015.
The London-, Hong- Kong- and Johannesburg-listed mining and marketing company has an installed capacity on a managed basis of close to 200-million tons of coal a year, across 22 mining complexes in three countries and backed by marketing offices in 19 countries.
Currently the largest exporter of coal from South Africa, Glencore Coal occupies premier volume positions in both Australia and Colombia.
It has cut $1.8-billion out of its costs since 2012 and its new production is firmly in the first quartile of costs, including its below-budget R8-billion Tweefontein Optimisation Project in South Africa, which is being commissioned six months ahead of schedule.
Glencore Coal achieved an earnings before interest, taxes, depreciation and amortisation (Ebitda) of 26% in the first half of the year and claims to have the best Ebitda of all the multi-continent diversified majors with a mix of thermal and coking coal.
Interestingly, Freyberg describes the company’s decision to stop producing in Australia for three weeks as pro-employee and union-backed.
Simultaneously, he reports that an opportunity exists to earn real export parities in Australia’s domestic market, where a large part of the industry is saddled with take-or-pay logistical obligations.
The resultant tightening of supply to domestic markets is allowing Glencore to create value by switching in and out of Australia’s domestic market as a result of its comparatively low take-or-pay exposure.
“Similarly, in South Africa, we're going to see more of that sort of behaviour as the market evolves,” says Freyberg.
The company has also succeeded in unlocking hundreds of millions of dollars a year in the synergies created through the blending of different kinds of coal.
“However, there are cycles and the industry is at a pretty bad time right now in terms of where the market is.
“Fortunately, we’re sitting at a pretty favourable part of the price curve with an average 26% margin in the first half and, with mines being wasting assets, we’re consuming them pretty rapidly at the moment as an industry, causing supply to drop off.
“That natural tightening, where demand actually catches up with supply, will happen in the near future,” says Freyberg, who adds that coal remains fundamental to Asian energy demand.
The further 255 GW of coal-fired generation that will be built in Asia by 2025 will require 800-million tons of coal a year, against the background of growing urbanisation coupled to the coal power being substantially more cost effective.
In India, for example, a dollar invested in coal-fired power generation delivers six times more energy than solar and four times more capacity than nuclear.
“When you go to the busbar, the actual cost of the coal energy is half that of solar and nuclear,” Freyberg points out.
But mine-expansion challenges remain and Freyberg outlines how community and economic issues have to be understood and open and honest engagement has to take place with communities to secure mining licences.
A case in point is the effort that Glencore went to to obtain a mining permit at Bulga, in Australia.
“You have to have a pretty good plan in place and you have to have a track record with the community to get through,” he says.
The company allows some of the 540 000 ha that it occupies globally to be used by host communities for agriculture, for example.
When Glencore acquired 13 mines in South Africa 14 years ago, the mines’ safety records were among the worst in the industry, which the company has succeeded in turning around.
Pictures were shown to investors of South African employees having pre-shift safety discussions at Tweefontein, where the focus on safety went hand-in-glove with the mine’s continuous miner team setting new output records in two seams.