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Glencore's strategic game: OPINION

GLENCORE's announcement to cut a whopping 15 million tonnes per annum of Aussie coal production in 2015 has left the industry guessing. <i>ICN</i> looks at the vulnerable operations and broader Glencore strategy.

Blair Price
Glencore's strategic game: OPINION

ICN is seeking answers on what mines will be impacted, what the cutback measures will be, how many jobs could be lost and when any of this might happen.

However, the spokesmen listed in Glencore’s 15Mtpa cutting announcement on Friday weren’t answering their office or mobile phones or responding to emails that day – so don’t hold your breath.

No mines are equal and it is easy to assume that the higher-cost, lower return operations are more likely to face cutbacks, or perhaps “production initiatives” to quote Glencore terminology.

This list seems to include the Collinsville and Newlands operations in Queensland. While Collinsville has faced various challenges for some time, Glencore cut 100 jobs from the Newlands open cut coal mine in the September quarter following 300 job cuts there in the previous year (2013).

The vulnerable sites in New South Wales seemingly include Glencore’s Tahmoor longwall mine and possibly the existing Ravensworth operations, with the Ravensworth underground mine already closed down in 2014.

While production could be cut from the weaker operations, it is also possible that Glencore could increase output at its low-cost, higher margin sites.

This would assume that Glencore did not achieve a 15Mt production cut and the scale of this reduction is enough to create some healthy scepticism of it actually being implemented.

The operations which could in fact increase output under such a scenario are likely to be Glencore’s Bulga mining complex and its Mangoola open cut coal mine.

In regard to the take-or-pay woes faced by coal companies, it should be noted that Glencore is more exposed to them in Queensland (like everyone else) while it has its own rail haulage division in NSW, potentially making it less financially damaging to reduce output in that state.

Getting strategic

Glencore has not become a powerful diversified mining/commodity trading house by accident and the announcement of the 15Mtpa production cut could perhaps help achieve at least some of the following:

  • Stronger price outcomes from premium annual thermal contract negotiations with Japanese utlilities – the start of the Japanese financial year looms on April 1;
  • A perception that Glencore is one of the helpful industry players which is trying to support coal prices by reducing production – which contrasts to the indifference shown by recent Rio Tinto comments in regards to Western Australia’s iron ore scene. It could be expected that Glencore and Rio management will have more interesting words for each other as the Glencore-Rio merger speculation builds this year;
  • The production-cut fear could also serve as possible leverage in relation to enterprise agreement negotiations with union officials for some Glencore coal operations; and
  • The opportunity to shift existing Asian customers into buying coal from higher-margin Glencore mines as opposed to lower margin ones – a profit-making move.

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