Fear not the "Glenstrata" giant, say coal customers

Reuters Business News
Posted: Feb 08, 2012 11:19 AM
Fear not the "Glenstrata" giant, say coal customers

By Jacqueline Cowhig

LONDON (Reuters) - Big coal buyers should not fear the merger of miner Xstrata <XTA.L> and trader Glencore <GLEN.L> into a dominant trading force, say customers who already rely on the two for supplies of coking coal for steel and thermal for power generation.

They say the tie-up, creating the world's largest coal exporter, will only formalize the long-standing collaboration between the two and end years of ambiguity over Glencore's role in marketing Xstrata's output.

If approved by shareholders, the combined powerhouse, dubbed "Glenstrata," would control one third of the world's seaborne coal trade, excluding China's coastal shipments. But this is still below the critical threshold to completely dominate the market, traders and analysts said.

They also predicted an inevitable shift in culture at the combined entity, which will focus more on production and cost efficiency rather than on low-margin risky trading bets - thus ultimately benefiting consumers.

"When two giants merge it makes you a bit uncomfortable at first about the effect on customers but we have seen them working together for many years," a coal buyer at a major European utility said.

Another major Glencore coal customer said he expected a merged company to be an even better counterparty from the risk point of view.

"It will be business as usual for their customers but I'd expect to see them behaving more like a producer, less emphasis on trading," he said.

"You can't go short, make that kind of play when you're long 150 million tons and effectively you're a producer - if you're making $60 a ton on top of your cash costs you operate in a different way - the culture change will be big," he said.

"There will be no change for us, as buyers," an Indian customer said.

Glencore is effectively taking over Xstrata to create a $90 billion group in the biggest ever merger in the mining sector to rival mining heavyweights such as BHP Billiton <BLT.L> but the deal has yet to win an approval from Xstrata shareholders [ID:nL5E8D733L]

Glencore and Xstrata have longstanding close ties between their coal businesses. Xstrata markets its own coal output but Glencore is paid a fee for marketing advisory services.

Glencore already had more influence over Xstrata's sales as a whole than either company would like to admit, sources with knowledge of the situation said.

"It's farcical to say that Glencore would have more clout over Xstrata's marketing than they already do, they've had that one-third of world coal trade forever, not much will change," one source said. Glencore already controls 34 percent in Xstrata.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ FACTBOX-Glencore-Xstrata output of commodities [ID:nL5E8D731C] Graphic on premium http://link.reuters.com/jyx46s Factbox on combined metals output [ID:nL5E8D731C] Deal sparking M&A [ID:nL5E8D32CN] Fiery CEOs [ID:nL5E8D24S6]


Glencore accounted for around 90 million tons of thermal coal trade in 2010, according to its pre-IPO documents, out of total trade of roughly 750 million tons. Xstrata produces just over 80 million tons of thermal coal plus coking coal used in steelmaking.

The group would control one-sixth of the world's total coal trade if China's 700 million tons a year of coastal trade is included.

"A merged Glencore-Xstrata would be No. 6 in coal globally, with around one-third of coal traded, but realistically you'd need half to two-thirds of production and a significant chunk of all the projected growth to be able to influence prices," said Andy Davidson, mining analyst with Numis Securities.

Liam Fitzpatrick, analyst with Credit Suisse, agreed that although Glencore and Xstrata together will be very big in copper, zinc and coal they will not be big enough to cross critical thresholds which would get significant scrutiny.

The combined group will have especially strong positions in Asia, the region predicted to remain the source of the global economic growth for the next years and possibly decades.

"They have strong enough market intelligence to spot trends, build inventories or slow production if they choose but it's not Glencore or Glencore-Xstrata which will change prices by speculating, it's Chinese hot money," said Davidson from Numis.

"You would expect them to find synergies, cut costs and that's likely to be better for the end-user, not result in higher prices," he said.

(Reporting by Jacqueline Cowhig, Editing by Dmitry Zhdannikov and William Hardy)