Glencore: riding high on the coal and commodity trading boom

Though obituaries were written long ago, King Coal not only survives but thrives. Glencore’s trading update on Friday featured a punchy assessment of the coal price, combined with news of a barnstorming performance from its marketing arm.

Despite all its past woes, this revealed why the London-listed natural resource company has become so popular following Russia’s invasion of Ukraine, at least for investors who can stomach the black stuff’s environmental impact.

Glencore’s marketing arm, customarily adept at navigating volatile markets, made the most of wild price swings. It should rake in more operating profit in the first half as it typically does in a full year. But the bulk of its profits — about two-thirds over the past two years — come from the mining side.

Coal mining — second only to copper in ebitda contribution last year — will also perform well. City consensus had expected first-half coal ebitda of $8.1bn. Glencore should beat that by a tenth, though higher coal prices come with greater government royalties, electricity and shipping costs. Its production cost per tonne could be a third higher than it forecast in February.

Royalties are likely to increase further. As an example, the Queensland government has flagged a likely rise after a 10-year freeze. But other cost increases can be passed on, given the lack of spare capacity in the mining industry.

Glencore is a cash machine and dirty coal helps. It will generate half its market value in free cash flow in less than three years, says Deutsche Bank. So long as net debt is below $10bn, Glencore will return any excess cash to shareholders. They could see a return of more than $6bn at the halfway point.

The looming economic downturn is a dampener. But an EU ban on Russian coal imports, from August, should offer price support. Glencore retained its coal assets, while also convincing investors of its ESG credentials. So far warnings of its demise, too, were premature.