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Posts Tagged ‘commodity’

Mining Week 20/’12: Commodity outlook and potential US coal takeover

May 13, 2012 Comments off

Top Stories of the Week:

  • Glencore and Rio Tinto fuel commodities outlook discussion
    • Glencore’s Ivan Glasenberg joined his collegue at Noble group and Rio Tinto’s CEO Tom Albanese in stressing that there are no clear signs of a slowdown of Chinese commodities demand.
    • Glasenberg stressed that inventory levels for many commodities are relatively low at the moment, contrary to the belief that increasing inventories should cause a drop of commodity prices somewhere in the next year.
    • Sources: Financial Times; FT Video on Noble outlook; The Australian

  • BHP Billiton rumoured to prepare bid for coal miner
  • ArcelorMittal – Macarthur

Trends & Implications:

  • A potential new takeover by BHP Billiton might be a good moment for BHP to announce writedowns on its acquisitions in the natural gas space. The acquisition of Petrohawk from Chesapeake last year is said to require a significant writedow as gas prices don’t seem to recover. Timing the market and combining the ‘exciting’ news of a takeover in the coal industry might partly overshadow the news of the writedown on the gas assets.
  • The decrease of annual growth of the Chinese economy to single digit numbers is expected to impact construction and manufacturing activity in the short term, but the underlying outlook for the longer term continues to be a shortage of supply. Experts struggle to relate the overall economic growth numbers to short-term growth of construction sector, which drives most of the commodities demand.

©2012 | Wilfred Visser | thebusinessofmining.com

Glencore to reshape board as IPO looms

January 26, 2011 Comments off

“Glencore plans a board shake-up as the world’s largest trading house heads towards a $50bn-$60bn public listing in London in the second quarter of the year. The Swiss-based trading house is talking to many current and former executives in the natural resources world about potential roles as senior non-executive directors for its new board, according to people familiar with the discussions.

Ivan Glasenberg, the South African chief executive of Glencore, recently held talks with Tony Hayward, the former BP chief, about a role as non-executive director in the trading house. Glencore has also held talks with Chip Goodyear, the former chief executive of BHP Billiton, the world’s largest miner by market capitalisation.

Bankers expect Glencore will disclose its plans for a $50bn-$60bn IPO in mid-March, when the trading house reports its annual results. But the trader is keeping its options open and it could still seek a merger with Xstrata, the miner in which it owns a dominant 34 per cent stake.”

Source: Financial Times, January 23 2011

Observations:

  • Glencore is one of the world’s largest private companies. However, it is experiencing growth problems as it can’t raise money to grow by issuing more equity. Furthermore the company needs to prepare for enormous payouts to top executives leaving the firm, which could cause liquidity problems. Going public would solve these problems.
  • The trading house, owning large stakes of various mining companies, showed strong profit growth for Q3 of last year, mainly driven by booming agricultural commodity prices.

Implications:

  • Most likely Glencore will have to perform an IPO before it can merge with Xstrata, as this is the easiest way to figure out the value of the company. Estimates of valuation of the company are based on a bond it issued at the end of 2009 and on industry multiples (PER of 14-18).
  • Various insiders question the probability of success of a merger with Xstrata, as the corporate cultures of the extremely results-driven trading house and the more relaxed mining house could clash. A merger between the two companies would produce the first fully vertically integrated natural resources major, which could open the door to new ways of negotiating with clients and new types of contracts.

©2011 | Wilfred Visser | thebusinessofmining.com

Steel price rise stokes inflation concerns

January 17, 2011 Comments off

“The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel.
That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy.

Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne.”

Source: Financial Times, January 16 2011

Observations:

  • In the interview on the FT-site Edward Hadas places the coal supply disruptions in Queensland due to weather conditions in the context of global commodity price increases over the past months. Key drivers for the continuing price increase are the increasing demand from China and India; the access to cheap money that fuels the demand; and the general shortage on the supply side, which has temporarily been increased by flooding.
  • Hadas argues that only some 20% of the global commodity trade volumes are affected by the weather conditions. This includes commodities like coffee and tea, for which production is much more susceptible to weather conditions than for mined commodities.

Implications:

  • Although the extreme weather conditions have a definite short term impact on coal and iron ore prices, they will not change the pricing in the long term. However, increased occurence of extreme weather conditions due to climate change will certainly make global commodity markets more volatile.
  • The transition to a quarterly pricing system for iron ore will enable the iron ore miners to rapidly pass on increased costs to the steel makers, further increasing the raw material costs.

©2011 | Wilfred Visser | thebusinessofmining.com

Vertical integration in mining: the trader’s value chain

May 21, 2010 3 comments

Vertical integration has been a significant driver of acquisitions in the mining industry in the past decades. As steelmakers and other mineral processers were trying to secure supply of resources, they increasingly decided to buy mines and mining companies. The next decade will show another interesting development. The vertical integration will increasingly include the next step in the value chain: trading.

Vertical integration in mining

The looming merger of Glencore and Xstrata will create the first of a new type of companies. The integrated mining, processing and trading companies will span the entire value chain of the resource world. This development is not unique. In many other industries the drive to become more customer-centric has resulted in similar moves.

The fact that a large part of the global resource production never enters the global trade and the nature of commodity markets, in which price is the key differentiator, has made the development in mining and metals slower than elsewhere. Furthermore, there is a large difference between the corporate cultures of the trading houses and the large mining companies.

Why integration?
Now why would the resource producers want to merge with traders? What synergies will be achieved in such a combination? The key of the answer is improvement of supplier power. A significant cost reduction and productivity improvement will be achieved by eliminating the trading department of the resource company after transferring the crucial activities to the trading house. However, most money will be made because of improved trading terms.

An exiting additional benefit in the long term could be that mines are going to produce on demand and just in time. If customer A in Japan sends its specified needs to the traders, the next step should be to translate the order into a production schedule for the mine and plant.

Consequences for mining
What will the integration along the value chain imply for miners? First of all they will slowly be forced to think more about the customer and less about the technology. Secondly, the production schedules will need to become more flexible in order to be able to deliver what is demanded. Finally, as the new company will be able to better respond to changes in commodity prices, more mines will start aligning their output volume with demand. In the extreme case this will mean that more mines will temporarily be shut down or sleeping mines temporarily opened again.

Concluding: Mining will become more flexible. Vertical integration including trading houses will not cause a revolution in the industry, but it will change priorities and slowly make the mining industry a more customer-centric environment.

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