Mining and Heavy Industries

Analysts split on Glencore’s coal hedging

Work at the Bulga mine. Photo: Glencore

Some market analysts have slammed a decision by Glencore to lock up contracts for 55 million tonnes of coal just before the spot price began to rise, while others have defended the move as “prudent”.

Glencore, which has been looking to improve its financial position since the market became concerned over its $71 billion debt pile in October 2015, secured hedging contracts late last year to sell 55 million tonnes of thermal coal – about half of its production over two years – at US$53 a tonne, which was roughly the market price at that point in time.

Since then, however, a prior move by Chinese authorities to limit domestic coal mining has seen thermal coal prices rise to almost twice that.

Glencore has certainly benefited from the lift, with quarterly thermal coal contracts secured last week at $94.75 a tonne with Japanese power producers. But with so much of its remaining coal volume down at such a low price, several analysts have criticised Glencore for the profit it’s missing out on.

Perhaps the most critical was Liberum Capital’s Ben Davis who, quoted in multiple sources, described the move as a “spectacular failure”.

“While hedging after the change in Chinese policy on domestic coal output turned out to be a spectacular failure, it is rare to see a central directive working so effectively and it was generally disregarded by the market at the time,” he was quoted as saying by Fairfax.

The Chinese move is estimated to have cut local production by as much as 15%.

Given those circumstances, some sources have been more neutral to Glencore’s move. Reuters analysis stopped short of criticising the trader, instead describing the move as “ill-timed”. And Citigroup analyst James Mcgeoch, according to the AFR, said the market was being harsh to the commodities giant.

He reportedly said Glencore is being undervalued on the market, and made a sensible move at the time.

“Personally I think it was a prudent one, all things considered at the time,” Mcgeoch reportedly wrote. “Personally if you want to sell Glencore stock you need a better excuse than this one.”

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