Glencore (OTC: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”GLNCY” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) has been on the ropes over the past year as the cyclical nature of the commodities sector seems to have caught up with the mining giant. Glencore’s stock price losses have erased nearly a third of its value despite a positive update in August 2018 that should have ideally boosted investor confidence.
[stock_market_widget type=”chart” template=”basic” color=”blue” assets=”GLNCY” range=”1y” interval=”1wk” axes=”true” cursor=”true” api=”yf”]Glencore Share Price Losses Explained
Glencore’s financial performance in the first half of 2018 was driven by an increase in commodity prices. Its earnings had increased 13% year over year to $2.78 billion on an 8% increase in the revenue to $108.6 billion. But Glencore’s first-half EBITDA of $8.3 billion, which was up 23% from the prior year period, didn’t match the analyst estimate.
As well, the commodity pricing environment has changed since the company’s last update. Weak Chinese demand and trade tensions with the U.S. have dented the metals rally. On top of that, a Department of Justice investigation into the company’s businesses in the Democratic Republic of Congo, Nigeria, and Venezuela regarding possible corruption has also weighed on the stock.
Strength in Diversification?
Glencore is different from the other metals and mining companies out there. Not only does the company market a big basket of commodities from third-party producers, but it also runs its own smelting, mining, refining, processing, and storage divisions. More specifically, Glencore deals in zinc, copper, lead, alumina, aluminum, ferroalloys, nickel, cobalt, and iron ore, so it is much more diversified as compared to those miners who rely on two or three commodities.
Now, Glencore relies on metals and minerals for almost 71% of its adjusted EBIT, with another 27% coming from the energy products business. Favourable market conditions in both these segments had driven up the company’s profit in the first half of 2018. The adjusted EBIT from metals and mining was up 45% year over year thanks to “healthy underlying demand, supportive physical commodity market conditions and overall growth in volumes handled.”
Copper prices, for instance, have been in free fall since the middle of 2018. The story isn’t much different for other metals either as the probability of low Chinese commodity demand pushed down prices of copper, aluminum, zinc, and nickel between 17% and 26%. However, iron ore prices have soared to 16-month highs thanks to potential supply disruption, helping pare losses.
Tough Times Ahead for Glencore in 2019
However, because the majority of the commodities in Glencore’s basket seem to have taken a hit, even diversification can’t save Glencore from near-term trouble when it releases its next set of results. Similarly, Glencore’s energy products business is in for tough times as Brent crude has fallen from highs of $84 a barrel in October last year to almost $62 a barrel. Generally, rising oil production in the U.S., as well as the trade war between China and the U.S., have cast a pall of gloom on this sector.
One possible silver lining is the consistent increase in coal prices, which could make up for the weakness in oil. The International Energy Agency believes that coal demand will remain stable going forward as it is preferred for generating electricity in developing nations, while supply will remain tight as developed nations look to reduce coal-fired generation and move to cleaner alternatives.
Overall, Glencore management’s comments on the health of its most important end markets will play a crucial role in determining the stock’s direction for the remainder of the year. Investors, however, should brace for tough times ahead as the weak base metals pricing environment and the decline in oil prices is going to hamper its near-term performance.
