[miningmx.com] – SOUTH Africa’s competition authorities may have to
take a closer look at the implications of the proposed merger between Xstrata, the
world’s biggest exporter of thermal coal, and trading house Glencore for the
domestic and export thermal coal market.
The proposed merger, which will create one of the world’s biggest mining companies
if approved by shareholders this month, may increase Glencore’s position in the
domestic coal market. It will also boost its share of exports through the Richards Bay
Coal Terminal (RBCT), which handles the majority of South African miners’
shipments.
Glencore, which mines coal in South Africa in partnership with Cyril Ramaphosa’s
Shanduka Group, may already control around 50% of thermal coal exports and is
seen as a price-setter in the domestic market, industry players said. Glencore
already owns a 34% stake in Xstrata, which mined 17.1 million tonnes (Mtpa) of
coal in South Africa last year.
“I would guess Glencore handles also most of the coal shipped through the Quattro
allocation by junior miners,’ one industry insider said. “They offer very attractive
financing terms in exchange for favourable off-take agreements, and they’re very
good at sorting out the logistics and getting Transnet and Richards Bay
allocations.’
However, calculating the extent of Glencore’s influence in the local market is nearly
impossible. “From the outside, it’s really difficult to see what they have. Unless you
know exactly which marketing agreements they have, it’s impossible to say what
portion of Richards Bay exports are handled by them. I’d estimate it’s at least 50%
following the Optimum Coal merger,’ an industry player said, speaking on condition
of anonymity.
“Shanduka Coal is very much a price-setter when it comes to domestic sales. They’d
basically sign quarterly contracts and the rest of us follow,’ he said.
However, last year the Competition Tribunal estimated Shanduka Coal’s share of the
export and domestic markets at less than 20%, and its share of the “tied’ domestic
market – sales to Eskom and Sasol – at less than 10%, when it considered its
purchase of Umcebo Mining. The Tribunal included Xstrata in these estimates as it is
seen as a related party through the Glencore shareholding.
Shanduka Coal has a production capacity of about 9 million tonnes of run-of-mine
coal a year, according to Glencore’s website. These numbers exclude Optimum Coal,
which mined 4.5Mt of saleable coal in the six months ending December. South
African miners produced 257.7Mt of saleable coal last year, according to XMP
Consulting.
In a letter to Xstrata Coal South Africa, National Union of Mineworkers General
Secretary Frans Baleni said the union was concerned about the impact the potential
merger would have on pricing in the South African coal sector, which is dominated
by a few players. This will have a “direct impact on energy costs and could
potentially have a negative correlation on the cost of doing business,’ the letter
stated.
NUM has not yet debated laying a complaint at the Competition Commission, said
Lesiba Seshoka, a spokesman. “We hope this has no impact on the coal price, but at
the moment we’re more worried about the potential impact it will have on
employees,’ he said.
Glencore, through Shanduka Coal, has been building its local mining portfolio
steadily since the mid-2000s. Take-overs include the buy-out of copper miner
Metorex’s coal assets in 2006. This led cement producer PPC and Eskom to raise
concerns over domestic pricing and the switching of domestic coal to the export
market, Umcebo Mining last year and the recent purchase of Optimum Coal, the
country’s fourth-biggest exporter.
“Glencore does what many others do. They pretend to be small, but they’re not.
They’ve been very clever to use the Shanduka name, and using subsidiaries to buy
stakes,’ a second industry player said. “Shanduka only owned 30% of the business –
it’s really all Glencore.’ Shanduka Resources increased its stake in Shanduka Coal to
50.01% in December in a deal worth about R700m. The competition authorities
approved the deal without conditions.
“They’ve also been brilliant at identifying underperforming coal assets with great
potential – typically where the owners struggled to get the logistics right – turn
them around and build them into big operations,’ the player said. “They’ve been
able to collect quite a lot of coal.’
The Umcebo bid led to a complaint by junior miner Endulwini Resources to the
competition authorities. Endulwini argued that the purchase would remove an
effective competitor from the market and restrict access to Richards Bay for other
empowerment miners, which benefit from the Quattro allocation scheme. Endulwini
also accused Glencore of anti-competitive behaviour in some of its off-take,
marketing, financing and joint venture agreements.
The Tribunal dismissed the concerns and approved both the Metorex and Umcebo
mergers unconditionally, saying it would not affect pricing. It urged Endulwini to
lodge its allegations of anti-competitive behaviour at the Competition Commission.
No complaint was ever submitted, said Molebogeng Taunyane, Commission
spokeswoman. Endulwini did not respond to a request for comment.
However, the competition authorities have recognised the increasing control of
Shanduka Coal and its related entities over RBCT when it considered the Optimum
Coal takeover earlier this year. Glencore will cut its annual allocation by a further
204,500 tonnes by March 2015 in favour of BEE miners, after ceding 197,000
tonnes on April 1. The Tribunal’s full ruling has not yet been released.
Quattro
The Richards Bay Coal Terminal, with an annual capacity of 91Mtpa, is controlled by
shareholders including Anglo American, Exxaro Resources, Xstrata and BHP Billiton.
Export allocations are based on shareholdings in the terminal. To accommodate new
and empowerment miners, 4Mt of export capacity have been allocated to black-
owned miners under the Quattro scheme.
However, access to rail capacity remains the major stumbling block for exporters.
Last year, RBCT received 65.7Mt of coal and shipped 65.5Mt.
South Africa’s Competition Commission is unlikely to block the Glencore/Xstrata tie-
up or impose significant conditions, said Xavier Prevost, an analyst at XMP
Consulting. “The South African assets are a very small portion of the merger,’ he
said. Glencore and Xstrata declined to comment on possible competition authority
concerns.
The biggest impact the merger may have on its local competitors is the possibility
that they too may become takeover targets, analysts said.
“I think it will give the new entity a bigger balance sheet to go after takeover
targets, one being Anglo or maybe even Fortescue Metals Group, to get exposure to
iron ore. It’s the commodity that they don’t really have in their portfolio at the
moment, other than the Zanaga project [Xstrata’s exploration project in the Republic
of Congo], which isn’t operational as yet,’ said Clinton Duncan, analyst at Avior
Research.
