BIZCOMMENT
Wednesday August 7, 2019 B7US trade flip-flop sets a confrontational trajectory
Glencore split from coal chapter could prove lucrative in more ways than one
A Glencore coal split could scratch mul-
tiple itches. The $42 billion commodi-
ties giant is the world’s largest thermal
coal exporter, at a time when miners are
under growing pressure from investors
to clean up. Separating the dirty fuel
from the rest would help that, and more.
It might even make sense for boss Ivan
Glasenberg to lead the carve-out.
Coal, where Glasenberg cut his teeth,
made up roughly a third of EBITDA last
year. That’s thanks to a jump in prices
mid-year, but high margins have made
it a reliable cash generator. Even so,
tougher environmental, social and gov-
ernance rules at large funds could prove
costly for miners like Glencore, which
also digs metals essential to the green
economy, if they get cut out.
Carving out thermal – along with
less significant coking coal production- would burnish environmental creden-
tials more than a February decision to
cap output. It may also shine a light on a
lackluster valuation. With forecast 2019
free cash flow of $6.3 billion, according
to Refinitiv, and rivals’ yields at around
10 percent, Glencore should be worth
over $60 billion; instead, it has a market
value just two-thirds of that.
Of course, that discount is not just
coal: There are problems with copper
and a US Department of Justice investi-
gation. But a separately listed coal busi-
ness could follow coal-to-aluminum
producer South32, which has had an an-
nualized total shareholder return, in US
dollars, of over 10 percent since splitting
from BHP in 2015. Glencore’s equiva-
lent is some minus 7 percent. A split
could even solve Glencore’s succession
question. Building an acquisitive coal
powerhouse focused on Asian demand
would make an eventual Glasenberg de-
parture less of a step down. Assuming
an EBITDA of $5.2 billion for 2019 and
the multiples on which rivals trade, a
coal-only entity could be worth $26 bil-
lion. Factoring in leverage around 3 to
4 times EBITDA, that would leave $8
billion of equity to be raised – tough but
not impossible, with Glasenberg’s Glen-
core equity and a name to woo partners.
None of this is on the cards yet. Asplit would have to factor in Glencore’s
coal trading operation, which has seri-
ous working capital demands. Still, the
group has sustained long relationships
trading minerals with companies it
doesn’t own. Coal is unloved and lucra-
tive. Split it off, and it can happily re-
main so.The author is Clara Ferreira-Marques, a
Reuters Breakingviews columnist. The
article was first published on Reuters
Breakingviews. bizopinion@globaltimes.
com.cnPage Editor:
[email protected]By Wen Sheng
S
ince US President Don-
ald Trump debated with,
and overruled, his major
economic advisors on Thurs-
day, and threatened via Twitter
that he will impose 10 percent
tariffs on a further $300 bil-
lion of Chinese imports from
September 1, the erratic nature
of the current US government
is ever-clearer.
Just one month ago in
Osaka, Japan, the leaders of
China and the US consented
to refrain from escalating the
trade war, and to resolve their
trade differences at the table.
Few in China could have
anticipated the White House’s
rapid turnabout. Now, pros-
pects for the continuation and
fruitfulness of bilateral trade
talks are darkening.
By whatever metrics, the
atmosphere for genuine trade
talks is being poisoned by the
White House as the Trump
administration is committed
to bullying tactics and intransi-
gence, setting a confrontational
course for the world’s two larg-
est economies.
As the past 13 months of
intermittent talks have shown,
the Chinese government will
not be moved by the great pres-
sure imposed by Washington,
because China aims to set a
standard for other countries to
follow: Never cave in the face
of a bully wielding a club of
tariffs.
“China’s position is very
clear that if the US wishes to
talk, then we will talk. If they
want to fight, then we will
fight,” said Zhang Jun, China’s
permanent representative to
the United Nations.
Time and again, China has
warned that if the US govern-
ment stubbornly ratchets up
belligerence and exacerbates
the trade war, it will meet with
China’s harsh countermea-
sures, and the White House
will have to take accountability
for the escalation of aversions.
Trump’s latest move, if put
into effect, will impose levies
on all of China’s exports to
America, which totaled $539
billion in 2018. The magnitude
of the trade war is unprec-
edented in history, demonstrat-
ing the current US administra-
tion’s malicious intention to
cripple and crash a fledgling
Chinese economy.
To soften the US’ high
tariffs assault, China has to
find a mattress. On Monday,
the People’s Bank of China, the
central bank, lowered the yuan
by 229 basis points against
the US dollar, and onshore
and offshore yuan weakened
beyond 7 against the greenback- a benchmark not breached
since 2008.
According to economic the-
ory, a weaker exchange rate for
a country’s currency will help
propel that country’s exports
while inhibiting imports.
In a statement, the central
bank said the depreciation was
attributed to US trade protec-
tionism and the imposition
of increased trade tariffs on
China. The bank reaffirmed
that China’s foreign exchange
management will pivot to back
up the economy and prevent it
from any harm premeditated
by others.
It is broadly believed that, in
the coming months, the cen-
tral bank will attempt to keep
the currency’s exchange rate
relatively stable, likely within
a reasonable range of 6.5-7.5
versus the US dollar, Chinese
economists predict.
However, if the Trump ad-
ministration gives up their lat-
est tariff threat and comes back
to the negotiating table, Chinawill certainly reciprocate, and
may intervene in the foreign
exchange market, selling out
more US dollars to defend the
value of the yuan.
Therefore, the conception
that Beijing has abandoned
its last hope for a trade deal
with the US government is
misguided. For the benefit of
both economies, and the global
economy as a whole, China has
always wanted to prevent the
trade war from expanding and
inflicting immense pain on
many people.
The two economic powers
shall not let a trade deal drift
further away.The author is an editor with the
Global Times. bizopinion@
globaltimes.com.cnFor the benefit of
both economies, and
the global economy
as a whole, China
has always wanted to
prevent the trade war
from expanding and
inflicting immense
pain on many
people.Illustration: Luo Xuan/GT