Glencore is considering a partial shutdown of a coal unit in South Africa in what would be the most decisive response so far to weak coal prices by one of the world’s largest exporters.
The UK-listed resources group is looking at cutting out 5m tonnes of export coal from its Optimum Coal Mines subsidiary, citing “difficult market conditions and the continued deterioration in the export coal price.” Glencore is the world’s largest thermal coal exporter.
The closure of the operations would affect about 1,070 jobs and be another blow to South Africa’s ailing economy as the government battles rampant unemployment and poverty.
“The coal mining sector is under stress and one has to see how the industry works through the challenges,” said Roger Baxter, a senior executive at the South African Chamber of Mines.
Glencore is one of the biggest exporters of South African coal and produced about 45m tonnes of coal from the country in 2013.
“The affected operations would be placed on care and maintenance,” Glencore said on Wednesday. “If the economic conditions improve, the company will consider reopening the operations.”
Thermal coal, used for generating energy in power stations, has traded below the marginal cost of production for the past three years, but only now are producers cutting production or mothballing mines.
About a quarter of global thermal coal produced for export was not making money at current prices, Glencore told its investors last month. Anglo American, its industry rival, is trying to sell several Australian mines.
Glencore has tried to highlight its readiness to cut output in weak markets. It instigated a three-week shutdown of production at coal mines in Australia over the Christmas period, taking about 5m tonnes out of the global market,
Ivan Glasenberg, the Swiss group’s chief executive, has been critical of other miners for increasing supply in a way that has weakened prices, particularly in iron ore, where Rio Tinto and BHP Billiton, the largest Australian producers, have been increasing output to maximise the use of the infrastructure built in recent years.
Glencore bought Optimum as part of a $750m deal in 2012. Its annual sales output is about 10m tonnes. About half is sold to South African power company Eskom and would stay in production.
Thermal coal fell between 17 per cent and 25 per cent last year, depending on the price benchmark, amid strong supply and tepid demand. Prices have remained under pressure in the opening weeks of 2015, with South African thermal coal trading below $60 a tonne.
In spite of the recent production cuts, analysts say the prospects for coal remain bleak. Policies to protect China’s domestic industry look likely to persist in the near term, while lower fuel prices and weaker commodity currencies have thrown a lifeline to high-cost producers.
Glencore said it had informed South Africa’s Department of Mineral Resources and unions about the potential closures.
Mr Baxter said: “The industry has faced a set of cost pressures that have come through and stakeholders need to be cognisant of the fact the industry is under pressure, and it’s not just coal, we’ve seen iron ore prices more than halve.”
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