Glencore's U.K. Gas Blowup Won't Spoil Blowout Year

(Bloomberg Opinion) -- U.K.-listed miner and commodities trader Glencore Plc has fingers in many pies, so I wasn’t greatly surprised to learn it now also has a minor role in Britain’s ongoing energy crisis.

Glencore-backed U.K. gas shipper CNG Group Ltd. has run into financial difficulties after several utility customers went bust owing it money. Its remaining utility clients will now have to find alternative gas providers. However, the current extreme level of wholesale prices could push some of them over the edge. If that happens, they’ll join the dozen British energy suppliers that have gone bust since the summer, heaping yet more pressure on regulators and the government to find an enduring solution to the mess.

Though Glencore has tried to grow its natural gas business, it remains a relatively small part of the company’s energy trading. So while these events are potentially disastrous for CNG and its customers, they’re likely to prove a relatively minor wrinkle in what’s shaping up to be a blow-out year for Glencore. 

The commodities giant has been a big beneficiary of the post-Covid economic rebound and, now, a global energy crisis that has boosted demand for its coal production. The group reported record first-half results, it’s swimming in cash and investors have finally taken notice.

Glencore isn’t the only commodities giant to suffer a bruising in the U.K.’s increasingly anarchic energy market: BP plc-backed retail energy supplier Pure Planet collapsed earlier this week.  

CNG has run into financial difficulties before. It suffered losses when Britain had an unusually cold winter in 2018 and some customers went bust. The accounts the following year included a going concern warning and the business underwent a restructuring. Glencore swapped monies owed to it for a minority equity stake and later extended 35 million pounds of loans. In hindsight that may have been ill-advised, given the financial weakness of some CNG clients. 

Glencore said this week it “has continued to support CNG and is engaging with the regulator in the hope that a solution can be found.” It’s probably not itching to provide an indefinite financial backstop though, even though it certainly has the means.

The Switzerland-based group is expected to generate an astonishing $21 billion of earnings before interest, taxation, depreciation and amortization this year, according to analysts polled by Bloomberg. Demand for many of Glencore’s commodities is booming and lately surging thermal coal prices have joined the fray. Chinese coal mines have been hit by flooding, increasing worries about tight supply. Meanwhile, customers are burning more of the dirty fuel because cleaner natural gas has become comparatively expensive. 

This is bad news for the climate crisis. But from a financial and energy security perspective, it partially validates Glencore’s decision not to quickly exit coal as many of its big mining rivals have done. Instead Glencore plans to run down existing coal reserves and has committed to reach net zero emissions by 2050.

A  diverse commodities portfolio leaves it pretty well positioned, no matter how the energy crisis plays out. For example, it’s a big supplier of zinc and prices of that metal rose higher this week when Nyrstar NV slashed output at three European smelters due to soaring electricity costs.

If governments conclude from the current mess that we need to accelerate investments in the energy transition, Glencore stands to profit here too. Its copper is used in wind power and electricity grids, while its cobalt and nickel are vital for electric-vehicle batteries.

Glencore’s capital expenditures are fairly restrained and its debt position is far more conservative than in 2015, when short-sellers bet on the firm’s demise. Soon, it may have more cash than it knows what to do with, providing room for increased share buybacks or dividends.

Having shunned the company due to its coal assets and on regulatory grounds — the company remains under investigation in various jurisdictions over alleged corruption — some investors seem to be coming around to the idea Glencore is investable after all. The shares have gained 65% this year, valuing the group at more than 50 billion pounds ($69 billion), not far off a record.

Even after this stellar run, the valuation doesn’t look too extreme. Glencore is projected to generate cash equivalent to almost half its current market value in just three years, and much of it may end up being returned to shareholders. But I wouldn’t bet on the U.K. gas sector enjoying a similar windfall. Glencore jammed its finger into a pie there and it’s left a burn mark. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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