Glencore chief Ivan Glasenberg is slashing Australian coal production because "we don't want to be the ones forcing the price down with oversupply", in a thinly veiled attack on the aggressive iron ore expansion being run by takeover target Rio Tinto.
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Mr Glasenberg went to lengths on Tuesday to position himself as a superior marketing manager to his counterpart at Rio Tinto and the other iron ore majors, which continue to pump tonnes into a heavily depressed market and push down prices.
Glencore is slashing its annual Australian coal production by 15 million tonnes, or about 15 per cent.
Mr Glasenberg stressed the tonnes Glencore was withholding were profit making, and dismissed the argument – used by the iron ore majors – that if you withhold supply, your competitors will simply fill the gap.
"What is key is we will cut back because we don't want to be the ones forcing the price down with oversupply," he said overnight Tuesday, after Glencore recorded a 7 per cent fall in full-year underlying profit to $US4.3 billion.
"Other people in other commodities have used the argument that 'someone else will fill that hole, so if we cut back 15 (million tonnes) we are going to look pretty stupid'.
"But we don't believe that where we cut production, that anyone is going to fill that gap. We know the market".
As part of his attempt to sell a merger with Rio to investors, Mr Glasenberg has attacked his rival's aggressive iron ore expansion strategy.
The colourful mining boss setting an example through his management of coal production and marketing is the latest manifestation of his strategy to create uncertainty over Rio Tinto's management tactics.
"What is important is that we are taking the decision that even though none of those cuts are loss making," Mr Glasenberg said.
"Even though they are profit-making tonnes, we would rather remove it from the market, because we believe those tonnes will affect the market price and affect our balance…so much that the loss of profit on the 15 million-tonne cut compensates for how it would hurt your 150 million managed tonnes (of total annual global production). That is very important."
Glencore's total coal production is about 150 million tonnes a year, of which its equity share is about 120 million tonnes, in a billion-tonne seaborne market.
'We are not going to dig the material out of the ground if we are not generating the right returns that we want as a company, we would rather leave it in the ground, it is not going anywhere," Mr Glasenberg said.
GLASNBERG'S TILT AT RIO TINTO CONTINUES
Glencore is desperate to become a serious iron ore player, and revealed on Tuesday it had a $US645 million writedown on fledgling African iron ore projects last year after putting their development on hold.
Iron ore prices have crashed about 50 per cent in the past year to hover at around $US63 a tonne, as a looming wall of supply – from Rio and fellow majors BHP Billiton, Vale and Fortescue Metals Group – begins to hit the market. At current prices, Rio and BHP still make huge margins.
Mr Glasenberg is thought to be preparing for a second tilt at Rio Tinto, after being rebuffed last year on a merger offer that would have created a $US190 billion ($250 billion) giant. Under UK takeover laws, Glencore cannot have another crack at obtaining Rio until April.
Despite this, Rio Tinto chief Sam Walsh said last week the mooted merger was 'not going to happen'.
On Tuesday the Glencore chief said that "we do not want to cannibalise our own production therefore we are not going to put our tonnes where we believe it could have a negative effect on pricing, if demand is not there for those extra tonnes".
"We did this in December last year, where we had a three week shutdown, it had a positive effect on pricing and we will continue doing this if we believe we are oversupplying the market."
The 15 million tonnes Glencore will drop this year is in addition to the 5-million-tonne reduction resulting from its three-week blanket shutdown at Christmas.
Thermal coal prices also continue to languish at about $US62 a tonne, well off the about $US130 the commodity was fetching three years ago.
When asked how quickly Glencore might reinstate the shelved production, coal boss Peter Freyberg said, "I think it's pretty unlikely we are going to rush back with 15 million tonnes and undermine the base that we have developed".
Mr Freyberg said global production was likely to return to 2013 levels of about 138 million tonnes.
To achieve production cuts, Glencore will scale back mining at some open cut operations, and defer some projects. It will not shut down any mines.
Last year about $600 million from costs were carved from the Australian coal division and Mr Freyberg said the group could hammer costs down further despite the fact it will have less production to spread costs across.
The coal portfolio is running on average costs of "well below" $US50 a tonne, he said.
The Australian Financial Review