This is because prior to its merger with Xstrata, it was a commodity trading company and thus had a major global resource base. Its combination of mining, marketing and trading operations is unique, giving it a unique understanding of its markets and a unique opportunity to leverage its market intelligence.
Central to its coal strategy is the market power afforded by its own and third-party production, particularly its dominance of high-quality coal as a benchmark for pricing in the wider market.
Glencore has maintained its position and pricing power in the market by adopting a depletion strategy rather than simply selling its mines to buyers who will continue to produce and have an incentive to increase output.
Few new coal mines are being developed anywhere in the world, and the flow of investment to expand existing mines, including from Glencore’s own shareholders, has dwindled under pressure from a global push to reduce carbon emissions.
The likely permanent reduction in Russian coal exports due to the invasion of Ukraine will only add to the pressure on the supply side.
Glencore has maintained its position and pricing power in the market by adopting a depletion strategy, rather than simply selling its mines to buyers who will continue to produce and have an incentive to increase production, as many of its peers have done.
In the absence of (most unlikely) significant new mines, prices will remain high and may even climb even higher, even if Glencore pulls volumes from the market. Demand for coal is unlikely to peak before the end of the decade, if it does then, and will remain strong for decades to come.
This will allow Nagle and his successors to deftly navigate the relationship between Glencore’s falling volumes and prices to maximize profits.
copper ambition
In his briefing, Nagle described Glencore’s ambitions in the copper industry, offering a different perspective on the company’s strategy in coal.
Like others in the industry, Glencore expects a structural global copper deficit in the future as renewable energy technologies and electric vehicle fleets continue to grow. There are many analyzes predicting a sharp drop in copper production relative to soaring demand.
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The metal’s bullish outlook has miners scrambling to position themselves with increased exploration and acquisitions, with BHP planning to invest $9.6 billion Acquisition of Oz Minerals Mainly because of the desire to tap into more copper reserves.
So far, however, copper prices have not reflected inflationary forecasts for the metal’s future. It is more than 20% below its peak earlier this year.
Nagle has a potentially large new mine in his portfolio, the $5.6 billion El Pachón mine in Argentina, as well as many opportunities to expand the company’s existing mines.
However, El Pachón will be developed as “the last taxi,” he said.
“When the price is there, when the world is screaming for the copper it needs, that’s when we’re going to bring in new supply.”
It’s another example of Glencore’s broader philosophy of value maximization, and its caution about greenfield products that increase sales to counter high prices and flatten or lower prices in the process. If demand allows, Glencore will expand its existing mine before seriously considering bringing El Pachón to the market.
If the long-term outlook for copper is bullish, the long-term outlook for coal is bearish. However, Glencore is proving that it is possible to maximize profits from fossil fuels no matter what.
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