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Analyzing Glencore’s Energy Segment

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Oct. 23 2015, Updated 5:06 p.m. ET

Energy segment

Glencore’s (GLNCY) energy segment was the biggest contributor to its 1H15 revenues. The company is mainly into the energy trading business, which accounted for ~90% of the energy segment’s 1H15 revenues. The company’s industrial activities accounted for only about 10% of revenues. In the energy business, Glencore deals in both oil and coal. Let’s learn more about these two businesses.

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Coal

Glencore has operating interests in over 30 coal mines in Australia, South Africa, and Columbia. It deals in both thermal and coking coal. Thermal coal is used in power generation while coking coal goes into steel production. Coking coal demand has come under pressure as steel production in China, which is the world’s biggest coal importer, has come down. Teck Resources (TCK), which supplies coking coal to China, has seen its stock price plummet this year.

Thermal coal demand has also been subdued as China has been adding to hydro and nuclear power generation capacity. Glencore is a major player in the thermal coal market and has a small share in the coking coal market.

Oil

Glencore trades in crude oil, refined products, and natural gas. It sources oil and oil products from major suppliers and also has some interests in production sharing contracts. The companys’s drilling activities have resulted in some new discoveries that need to be further developed. However, it will be interesting to see what the company does with these energy discoveries with depressed energy prices.

Apparently, major energy (XLE) companies, including ConocoPhillips (COP) and Suncor Energy (SU), have slashed their capital expenditure budgets in response to falling energy prices.

In the next part, we’ll look at Glencore’s agricultural products segment.

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