International commodities producer and trader Glencore International plc reported March 5 that its 100%-owned Prodeco coal mining operation in Colombia produced 14.6 million tonnes in 2011, an increase of 46% compared to 10 million tonnes in 2010.
This substantial increase is largely attributable to an ongoing production expansion project, which is forecast to increase production to 21 million tonnes per year by the fourth quarter of 2013, said Glencore in announcing its 2011 preliminary results. Glencore, long a privately-held commodities giant, is making results announcements because it went public last year in an IPO.
At Prodeco’s Calenturitas mine, the Sector A mining area has been opened, contributing 4.3 million tonnes of the 7.6 million tonnes produced in 2011, a 46% increase from 5.2 million tonnes in 2010. Production at the La Jagua mine was 7 million tonnes last year, a 46% increase compared to 4.8 million tonnes in 2010.
The increased production across Prodeco’s mines was somewhat constrained by delays in delivery of mining equipment from Japan in the aftermath of the tsunami that damaged Japanese industry and infrastructure in early 2011, as well as the downtime of 21 rain days in excess of budget, primarily due to exceptionally heavy rains in October and November 2011.
The largest capital expenditure project currently underway is the construction of the new direct loading port (Puerto Nuevo in Cienaga), which will provide Prodeco with higher annual throughput capacity and a lower operating cost, compared with the current port at Puerto Prodeco (Zuniga). The new port project is on schedule and expected to be commissioned in the first quarter of 2013.
Prodeco currently exports the majority of its coal through Puerto Prodeco which operates under a private concession awarded by the Colombian government. This concession expired in March 2009, however, the Colombian government has let Prodeco use the port under annual lease agreements. To comply with new government regulations on loading methods, which became effective from July 2010, and to remove the uncertainty of the annual concession renewal process associated with Puerto Prodeco, Prodeco has commenced construction of a new, wholly owned, port facility, Puerto Nuevo.
Colombia is a major exporter of coal into the U.S. Atlantic and Gulf coast power plant markets, and Glencore is not the only company expanding coal production there. Other expansion projects are being undertaken by Alabama-based Drummond Co. and its new partner in its Colombian mining operations, and also by the three co-owners of the big Cerrejon mine in Colombia.
Glencore is a leading integrated marketer and producer of natural resources, with worldwide activities in the marketing of metals and minerals, energy products and agricultural products and the production, refinement, processing, storage and transport of these products. Glencore noted that its long experience as a commodity merchant has allowed it to develop and build upon its expertise in the commodities which it markets and cultivate long-term relationships with a broad supplier and customer base.
Glencore seeks quick expansion following IPO
In May 2011, Glencore International plc was admitted to the official list of the UK Listing Authority and commenced trading on the London Stock Exchange’s premium listed market and on the Hong Kong Stock Exchange via a secondary listing.
On Feb. 7, the Glencore directors and the independent Xstrata plc directors announced that they had reached an agreement on the terms of a recommended all-share merger of equals of Glencore and Xstrata to create a $90bn natural resources group. Xstrata produces a number of commodities, including coal, but is much less of a commodities trader than Glencore.
“The announcement on 7 February of our proposed merger with Xstrata is the logical next step for two complementary businesses to create a new powerhouse in the global commodities industry,” said the March 5 Glencore preliminary results. “This is a natural combination which will realise immediate and ongoing value from marketing the combined group’s products to maximise supply chain margin opportunities including via blending, swapping and storing to meet customers’ needs more efficiently and cost effectively. Furthermore, the combined group’s enhanced scale, diversification and financial flexibility in combination with Glencore’s existing relationship with thousands of third-party commodity producers worldwide, is expected to allow us to capitalise on more opportunities to grow the enlarged asset base. The new company, Glencore Xstrata, will be the most diverse major resource group which will be in a position to realise immediate and ongoing value for its shareholders.”
2011 turned into a rough coal year for several reasons
In relation to its coal trading business, Glencore said that in the first half of 2011, demand for coal was strongly supported by cold weather-related demand, combined with supply shortages due to Australian flooding and adverse weather conditions in Colombia, which left the traded market relatively tight. The effect of the Japanese earthquake and tsunami on nuclear generation also played a role in increasing demand for coal, especially in the “environmentally sensitive” Atlantic markets.
Thereafter, the global financial crisis and uncertainty surrounding consumption patterns led to many players taking a cautious approach towards longer term commitments and a move to a more spot price oriented coal market. This resulted in lower demand and prices. Prices fell further towards the end of 2011, impacted by mild weather and robust coal supplies, especially from the U.S., which affected the Atlantic markets, whereas the Asian markets remained more robust and resilient, although the general trend was also lower, Glencore noted.
The outlook for 2012 remains positive, although some market weakness can be expected during the early part of the year due to the uncertainty related to the European sovereign debt crisis. After that, Glencore said it expects demand to pick up and remain stable on the back of lower inventories and reduced nuclear capacity. “The availability of good quality coal is likely to remain constrained with most of the growth in production centred on lower quality products, which is therefore likely to allow good quality coal to enjoy solid premiums over the rest of the market,” Glencore added.
Glencore said its coal focus remains committed to continue a growth strategy around strengthening of global partnerships with key players in the Pacific and Atlantic markets and to build up arbitrage and multi-sourcing capabilities beyond equity investments. Glencore said it is well placed in this respect with most of its production and equity partnerships covering premium quality coal.