Glencore to shut Australian coal mines temporarily

Glencore (LSE: GLEN) says it plans to shut down its coal operations in Australia for three weeks starting from mid-December due to slack demand and weak prices.

The Swiss-based mining and commodities trading firm and Australia’s biggest coal exporter said the move would cut 5 million tonnes of its coal output from an oversupplied market.

“This is a considered management decision given the current oversupply situation and reduces the need to push incremental sales into an already weak pricing environment,” Glencore reported in a news release.

Glencore is the world’s largest producer of seaborne thermal coal (used for energy generation), and has interests in 20 coal mines across 13 mine complexes in Australia.

“Glencore’s decision reflects the current challenges in the coal export markets, with the oversupplied conditions and low prices leaving many producers with thin to negative cash margins,” says Mike Plaster of SalmanPartners in Vancouver. “We’re seeing lots of operations around the world shutting down, laying off or cutting costs, so this move by Glencore doesn’t come entirely as a surprise.”

If pricing stays weak, Plaster adds that “we could see some more closures. I think everyone has to take a close look at their operations.”

Two days after Glencore made the news public, the Australian and Chinese governments signed a free-trade agreement that includes a reversal of Chinese tariffs on coal imports implemented on Oct. 15. Under the Nov. 17 memorandum of understanding, China’s recent 3% import duty on coking coal (used in stainless steel production) will end immediately, while its 6% duty on thermal coal will be eliminated within two years.

Prices for thermal coal have been cut in half over the last three years from US$110-US$130 per tonne to just over US$60 per tonne. Spot prices at Newcastle’s major export terminal are US$61.85 per tonne.

The Age, a daily newspaper published in Melbourne, describes the size and length of Glencore’s shutdown as “unprecedented,” and said the move “could be a challenge to iron ore majors BPH Billiton and Rio Tinto, who Glencore chief Ivan Glasenberg has attacked for dramatically expanding production in the face of falling iron ore prices.”

Analysts at Investec Securities agree. Glencore is “hoping perhaps that others may follow suit,” the London-based analysts commented in a research note, describing the move as “a clear jab at BHP and Rio’s approach to ramping up iron ore operations,” despite falling iron ore prices.

Investec also pointed to more “bearish” news about the thermal coal market in India. “India’s power and coal minister stated … that India may stop imports of thermal coal in the next three years, as Coal India doubles domestic production to 1 billion tonnes.”

Despite the downturn in coal, Glencore states that it remains “confident in demand growth for our products, and believe that the supply and demand balance will be restored in the medium-term.”

In the meantime, the suspensions in Australia next month mean staff will be forced to take three weeks of paid annual leave.