http://www.businessweek.com/news/2012-10-03/billionaire-glasenber...

http://www.businessweek.com/news/2012-10-03/billionaire-glasenberg-bets-on-coal-rebound-with-xstrata-energy

Glencore International Plc (GLEN)’s Ivan Glasenberg, who built a $6 billion fortune trading bulk commodities, is anticipating a rebound in coal prices from a 31- month low to justify his $33 billion bid for Xstrata Plc. (XTA)


Xstrata, the world’s largest exporter of coal burned by power stations, this week recommended Glencore’s sweetened offer after initial opposition from shareholders. The fuel accounted for 24 percent of Zug, Switzerland-based Xstrata’s 2011 sales.

Glasenberg’s quest for Xstrata follows a 24 percent plunge in coal prices in the past year, caused in part by the U.S. shale gas revolution. The combined company will have interests in about 35 coal mines in Colombia, Africa and Australia, and account for about 10 percent of global seaborne exports, putting Glasenberg’s reputation for well-timed investments on the line.

“The timing of this merger for Glencore is probably very good,” Christopher LaFemina, an analyst at Jefferies Group Inc., said in an interview. “Buying Xstrata during a period when coal margins are nearing a cyclical trough is smart.”

The bet on coal by Glasenberg, 55, Glencore’s chief executive officer, is based on assumptions that would underpin a coal price recovery, analysts said. One is that the explosion of natural gas from shale in the U.S. won’t be seen anytime soon in other nations, where it likewise may send prices plunging for gas, the main alternative to coal in power generation.

Biggest Takeover
The acquisition of Xstrata, which would be the largest takeover of 2012, is expected to be cleared by Dec. 31, the companies have said. Xstrata’s support for the deal brings Glasenberg another step closer to a transaction that’s been five years in the making. The one-time coal trader is Glencore’s largest shareholder, with a 16 percent stake valued at about 3.8 billion pounds ($6 billion) at yesterday’s share price.

Glencore declined to comment for this story.

Coal at the Australian port of Newcastle slumped to $81.15 a metric ton on July 20, the lowest since December 2009, according to data from IHS McCloskey.

Thermal coal margins are set to improve in the next two to three years as producers respond to lower prices by shutting operations, LaFemina said. “It’s not a good environment to develop a coal mine now. Supply will get constrained and demand will recover.”

Prices will rebound to average $100 a ton this year and remain in that range during the next two years, according to Macquarie Group Ltd. estimates.

Coal Bet
The Glencore deal “is a bet” on coal, said Jeff Largey, an analyst at Macquarie Group in London. Glencore is well- positioned through its marketing and trading businesses to increase coal margins because of its ability to match buyers and sellers and blend different grades, he said in an interview.

“Glencore must be assuming, as we do, that coal remains key to the energy mix for decades,” Largey said. “Coal still accounts for about 80 percent of the energy production in China and 45 percent in Japan and coal will remain the baseload for Japan even as it moves away from nuclear, so globally it’s not possible to get away from coal.”

Power plants worldwide will increase their use of coal by an average 2.3 percent a year from 2009 to 2035, the International Energy Association said last year, basing the forecast on current energy policies. That was a higher growth rate than the IEA predicted for gas, hydroelectric or nuclear in the period, while oil use was forecast to fall.