GLNCY Glencore Plc (PK)

By Rhiannon Hoyle 

NEWCASTLE, Australia-- Glencore PLC's coal chief on Wednesday played down concerns over workings of its secretive trading arm, as the company continued to assure investors about the health of its business model.

Some investors have described Glencore's marketing unit as a "black box" in which the risks are impossible to value, leading to wild swings in the resources giant's share price in recent weeks.

"There's no great mystery here--very simply our marketing business is a global logistics network that generates income from arbitrage opportunities that we see and act upon, ultimately delivering the physical commodity to our industrial customers around the world," head of global coal assets Peter Freyberg said in prepared remarks for a speech in Newcastle.

He said Glencore's trading business targeted various forms of arbitrage to turn a profit, including pricing differences for the same product in different regions around the world.

"Glencore's economies of scale in sourcing, transportation, storage, insurance, finance and risk management are core strengths," he said, adding that the company has "successfully been navigating commodity cycles for more than 40 years."

On Tuesday, Glencore released fresh information about its finances, as the Switzerland-based company continued a communications blitz that has helped shore up a rebound in its battered stock.

In a fact sheet, Glencore said it would only face a modest rise in borrowing costs should its credit rating be downgraded after a downturn in world commodity markets.

Commodities it trades such as copper and nickel, as well as coal, have fallen sharply thanks to ample supplies and an economic slowdown in China, the world's top buyer of many natural resources.

Investors worry that downgrades could hamper Glencore's debt-fueled trading business, the catalyst for recent sharp jolts in the company's share price.

"Our business remains operationally and financially robust--we have positive cash flows, strong liquidity and no solvency issues," said Mr. Freyberg.

He said the "key challenge for Glencore and other resource companies is the current commodity pricing environment."

Glencore has been pummeled by a collapse in coal prices that has led it to rein in production of the commodity.

World coal markets are plagued by oversupply, as demand from China cools on a push for cleaner-burning fuel, measures to protect its own mining companies and a weakening in its pace of growth.

"The global coal market is still is rebalancing in view of weaker-than-predicted Chinese coal demand," Mr. Freyberg said.

Last month, BHP Billiton Ltd.'s coal chief painted a bleak picture for the coal-mining sector, projecting depressed prices would continue for some time.

But Mr. Freyberg said Glencore "has reason for optimism."

He projected a robust appetite from economies including South Korea, India, Japan and Vietnam, citing forecasts by the International Energy Agency that global energy demand will rise by 37% over the next quarter-century.

"Our long-term thermal supply and demand outlook has never relied on ongoing Chinese import growth," he said.

When Glencore closed its purchase of mining company Xstrata in 2013, Chief Executive Ivan Glasenberg said the blockbuster deal was "a big play on coal."

Glencore is now the world's biggest exporter of thermal coal, burned in power plants, and ships metallurgical coal, used to make steel.

But prices have been sliding since 2011 and now trade at their lowest level in around a decade. About 14% of the global coal-export industry is unprofitable, according to commodities consultancy Wood Mackenzie.

Many producers have been able to cut their operating costs as prices fell, a move that has kept more mines running despite the global glut of the energy commodity.

Mr. Freyberg said one of the challenges facing the coal industry now is an "increasingly militant" campaign by activists to convince fund managers and banks to abandon coal investments.

"This campaign fundamentally ignores the global energy reality and the resources required for economic growth and development," he said.

Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com

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(END) Dow Jones Newswires

October 06, 2015 21:45 ET (01:45 GMT)

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