BAKU, Azerbaijan, March 5
By Leman Zeynalova - Trend:
Glencore plc is a British multinational commodity trading and mining company with headquarters in Baar, Switzerland, can reduce production of any commodity in response to changing market conditions, Trend reports citing the company.
The company says that future demand for certain commodities might decline (e.g. fossil fuels), whereas others might increase (such as copper, cobalt, and nickel for their use in electric vehicles and batteries), taking into consideration the transition to a low carbon economy.
“Furthermore, changes in expected supply and demand conditions impact the expected future prices (and thus the price curve) of each commodity and significant falls in the prices of certain commodities (e.g. copper, coal and cobalt) can have a severe drag on our financial performance, impede shareholder returns and could lead to concerns by external stakeholders as to the strength of the Group's balance sheet,” Glencore said in its report.
Government policy decisions can be very important, e.g. in reducing the demand for coal or increasing its pricing (via carbon taxes), according to the company.
“This risk is more prevalent in certain commodities, such as steel, coal and oil. In particular, many analysts believe that demand for coal will reduce sooner than previously expected due to political pressures, cost reductions for alternatives (renewables and LNG) and possible carbon taxes. The dependence of the Group (especially our industrial business) on commodity prices, supply and demand of commodities, make this the Group's foremost risk.”
The report says that divergence has been observed across different commodities over the past 12 months, with increasing levels of volatility seen, driven by global shifts in the supply-demand balance.
“Given the volatility of commodity prices over the past year and historically, we continue to focus on the partially controllable element of the margin equation - production and costs. The recent emergence of the novel coronavirus could lead to substantial disruptions in China which could impact the demand for the commodities supplied by the Group in this and other markets. Although, the risk of a large scale spreading of the virus remains uncertain in 2020, near term weakness is a reality, and it could have additional longer-term material adverse effects on commodity markets.”
New or improved energy production or technologies can also reduce the demand for some commodities such as coal, said Glencore.
“Major decisions by governments can also lead to lower growth of some countries or regions, such as U.S./China trade decisions and Brexit. Any adverse economic developments, particularly impacting China and fast growing developing countries, could lead to reductions in demand for, and consequently price reductions of, commodities,” said the company. “We maintain both a diverse portfolio of commodities, geographies, currencies, assets and liabilities and a global portfolio of customers and contracts.”
“We prepare for anticipated shifts in commodity demand, for example by putting a special focus on the parts of the business that will potentially grow with increases in usage of electric vehicles and battery production, and by closely monitoring fossil fuel (particularly thermal coal) demands. We can also reduce the production of any commodity within our portfolio in response to changing market conditions.”
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