JOHANNESBURG: Miner and commodities firm Glencore cut its forecast on Wednesday for earnings from trading, a division meant to help cushion the company against tumbling commodities prices, sending its shares to record lows.
Glencore said tough market conditions, especially for aluminium and nickel, were hurting the business even though it had previously said the trading division would meet earnings targets whatever happened to commodity prices.
Announcing a 29 percent slump in first-half earnings on Wednesday, Glencore said it expected trading, or what the company calls its marketing division, to post full-year earnings before interest and tax of $2.5 billion to $2.6 billion.
Glencore Chief Executive Ivan Glasenberg had previously said he expected the trading division to generate $2.7 billion to $3.7 billion in full-year earnings before interest and tax “no matter what commodity prices are doing”.
The company’s shares slumped more than 9 percent to a record low of 159.5 and were down 8.1 percent at 1050 GMT, the worst performer on the FTSE 100 stock index.
“Glencore’s high exposure to copper, whose prices are at their lowest since 2009, is a weakness.
Also, the lower projected earnings of the company’s trading arm, which is supposed to help the firm buck the commodities cycle, highlight the limits of its business model in this low-price environment,” said Sebastien Marlier, commodities analyst at the Economist Intelligence Unit.
Glencore shares are down about 40 percent this year, underperforming other global miners such as Rio Tinto and BHP Billiton, and compared to a 26 percent fall in the FTSE 350 mining index.
Glencore also said it would cut capital spending again next year to $5 billion from a previous forecast of $6.6 billion.
It trimmed capital spending plans for 2015 last week to $6 billion from a $6.5 billion to $6.8 billion range announced in February.
“It’s hard to predict what China is doing, as an industry we should not be increasing production in anticipation of China demand,” Chief Executive Ivan Glasenberg told Reuters. “We will pull back our own production if necessary. Keep it in the ground, you can dig it out anytime.”
Formerly just a commodities trader, Glencore merged with mining company Xstrata in 2013.
The marketing business was seen as a plus in diversifying earnings of the combined company as its success was not so closely tied to commodity prices.
Glencore said first-half adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) fell 29 percent to $4.6 billion, while earnings from its marketing division fell 27 percent to $1.2 billion.
Chief Financial Officer Steve Kalmin said the company’s cash flow was “comfortable” to service its debt, return cash to shareholders and support growth in copper and zinc production, where it was pursuing new opportunities.
The price of copper, Glencore’s largest earner, is at six-year lows weighed down by a slowdown in China, one of the world’s biggest consumers of metals and other raw materials.
“We are still looking for growth in both copper and zinc production in the second half of 2015 and then continuing in 2016,” Kalmin told Reuters.
“Those in particular are the two commodities that we see going forward fundamentally looking in much better shape than other commodities.” Rivals have also reined in spending and cut costs.
Rio this month said it planned $1 billion in cost cuts this year and Anglo American is to cut thousands of jobs in the next few years and may sell assets.
Analysts had expected deeper cost cuts by Glencore to ease the strain on its debt levels and protect its credit rating.
Glencore said its net debt fell by about $1 billion to $29.6 billion in the first half and aims to reduce this further to $27 billion by the end of 2016.
Coal prices, another major commodity for Glencore, also show no sign of recovering due to a supply glut.