What happens next to Glencore depends on copper prices

‘The investment case for its equity may hinge on small changes in commodity prices’ – JPMorgan analyst.
Looking beyond this week’s whipsaw swings in Glencore Plc’s share price, the outlook for the embattled miner-cum-commodity trader will largely depend on the copper market.
The Swiss company is the world’s biggest copper supplier, and got about 28 percent of its earnings from mining the metal in the first half. That makes it susceptible to moves in the commodity, and if this year’s downward slide continues, banks including Macquarie Group Ltd. and JPMorgan Chase & Co. say the company may need a more aggressive plan to reduce debt.

Prices of reddish metal, used in everything from plumbing to power grids, have dropped as the economy slows in China, the world’s biggest consumer. Copper has fallen 18 percent on the London Metal Exchange this year to about $5,100 a metric ton and is set for a fifth straight monthly decline. In 2011, the year of Glencore’s initial public offering, prices were as high as at $10,190.

Glencore’s share price, which despite a two-day rally is still down 70 percent this year, has tracked the copper market.

“The investment case for Glencore’s equity may hinge on small changes in commodity prices,” JPMorgan analyst Dominic O’Kane wrote in a report Wednesday. “Glencore does not face an imminent liquidity crisis, in our view, and we believe legitimate concerns for its credit rating can be addressed via disposals.”

At current commodity prices, Glencore needs to increase its debt-reduction target by additional $4 billion on top of the $10 billion already planned, Macquarie Group Ltd. analysts wrote in a report on Tuesday. Should prices fall a further 5 percent, the target would need to rise by an additional $5 billion to $19 billion, Macquarie said.

JPMorgan estimates a $10 billion shortfall in Glencore’s plan by the end of next year to sustain its current credit rating, crucial for the profitability of its trading business. The shortfall widens to $15 billion if prices fall 5 percent.

The vulnerability to a further drop in commodity prices helps explain the nervousness of credit markets.

Copper may have further to fall. Goldman Sachs Group Inc. expects prices to drop to $4,800 a ton by the end of December and $4,500 at the end of 2016 and predicts the bear market will last years, according to a report last week. Deutsche Bank AG says prices will average $4,650 a ton next year.

Concerns about the slowing demand from top consumer China, surging stockpiles and the prospect for rising interest rates in the U.S. suggest copper will slump further, Goldman said.

The main culprit is China, where the economy is set to grow at the slowest pace in more than two decades. The nation’s copper consumption will increase just percent 2.4 percent this year from an average of 7.5 percent in the past five, Deutsche Bank said in a report on Tuesday.

The fading appetite for copper has coincided with a surge in supply as years of investment in new mines added to the glut of metal. Production is set to exceed demand by 250,000 tons this year, according to estimates by Societe Generale SA.

Not everyone is pessimistic. Today’s oversupply may start to reverse, pushing prices above $5,700 a ton by the fourth quarter, Citigroup Inc. says. More than 1.5 million tons of output has been lost this year for reasons ranging from riots in Chile to droughts in Zambia and Papua New Guinea, the bank’s analysts including David Wilson said in a report Sept. 15.

In addition, Glencore has spearheaded output curbs in response to falling prices. The company said earlier this month it plans to reduce copper output by about 20 percent over the next 18 months by shutting two of its flagship operations in Africa.Freeport McMoRan Inc.and Asarco LLC are also curtailing production, and other rivals may follow.

©2015 Bloomberg News



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