Glencore says marketing ebit to exceed full year $3.2bn guidance by mid-year

Newcastle, NSW, Australia, June 2019, Coal loading for export

GLENCORE said today that its marketing business would earn more in the first six months of its 2022 financial year year than previously forecast for the entire year.

In a trading update, the miner said half-year earnings before interest and tax (ebit) would exceed $3.2bn which represents the upper end to its full-year $2.2bn to $3.2bn adjusted ebit guidance. This was a result of income from thermal coal which had traded at record levels to the pricing benchmark and quality categories. There had been an “unprecedented dislocation in energy markets over the year to date,” Glencore said.

Russia’s attack on Ukraine has resulted in a combination of reduced energy exports and sanctions imposed on Russian gas which has sent European and Asian utilities back to thermal coal with a consequent boost in the fuel’s pricing.

Thungela Resources, a Johannesburg-listed coal producer, said earlier this week that the average benchmark price for energy coal increased to $266/t as of end-May compared to $98/t for the corresponding period last year.

Glencore said it expected the energy markets to moderate in the second half of its financial year beginning on July 1. It added that the adjusted ebit annual guidance range of $2.2-3.2bn would persist through the commodity cycle.

The positive update will come as no surprise to the investment community which recently saw shares in Glencore reach a new all-time high. “We estimate the marketing business should generate record profits this year,” said Ian Rossouw, an analyst for Barclays in a report earlier this month.

In addition to increased energy coal pricing there has also been cost inflation which Glencore said would see an increase in unit costs for the six months ended June.

“In line with the higher coal prices, government royalties have increased significantly relative to our February cost expectations, which together with higher input costs (including diesel, explosives, logistics and electricity), are expected to result in an increase in our reported average FOB thermal unit cost for the period to about $75-$78 per ton, compared to earlier guidance of $59.3/t for 2022,” it said.

Despite the inflationary pressure, Glencore was well positioned, according to a report today by RBC Capital Markets. “We continue to expect that Glencore’s ability to return cash is unsurpassed in the sector and the company remains structurally better positioned than peers through an economic downturn with coal tightness helping to insulate profitability,” said the bank’s analyst Tyler Broda et al.

Glencore is on course for group ebitda (earnings before interest, tax, depreciation and amortisation) of $29bn for 2022 of which coal comprises around 36% ($10bn), according to JP Morgan Cazenove in a recent report. At spot, however, ebitda is more like $40bn of which coal is half.

“We expect coal prices to remain higher for longer due to the Russia/Ukraine conflict and for this to underpin exceptional cash returns by Glencore over the next one to two years,” according to UBS analysts, Myles Allsop and Daniel Major.