By Simon Constable
Swiss-based commodities company Glencore has emerged as a prime beneficiary of Europe's energy crisis.
High prices for coal, one of the company's main offerings, are likely to persist as the war in Ukraine pushes past the six month mark. That, in turn, could lead to double-digit gains for the stock.
"Glencore has already outperformed, and we think there is more to come," says Tyler Broda, head of European mining at RBC Capital Markets in London. "Russia's invasion changed the calculus in the global energy balance, and coal is a very key part of that, especially in Europe."
Broda sees the stock (ticker: GLCNF.UK) rallying to 5.50 pounds sterling ($6.66), up 13% from its recent price of GBP4.85. Such a rally would add to already impressive returns for Glencore this year.
Glencore, with a market value of more than $60 billion, has interests in mining, marketing of minerals and materials, and recycling. Last year, the metals and minerals segment earned the lion's share of profits. However, this year energy products, particularly coal, look set to dominate. Many of the company's nonenergy materials, such as cobalt, copper, and nickel, are vital to the longer-term global transition away from fossil fuels.
In the year through Monday, the stock delivered total returns (stock gain plus dividends) of 26%, according to Morningstar data. That compares with losses of 9% over the same period for the SPDR S&P 500 $(SPY.AU)$ exchange-traded fund.
Glencore recently reported record first-half profits. Adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, totaled $18.9 billion. And the firm said it would return $4.5 billion more to shareholders in buybacks and dividends than was previously planned.
Looking deeper, it's clear that this outperformance could last a while.
Those gangbuster results were driven in large part by the company's energy division, which made $12.6 billion in the first half, far exceeding the energy segment results for all of 2021. Over the past 10 months or so, coal prices have soared, recently fetching $408 a metric ton, up from less than $150 last November, according to data from TradingEconomics.com.
"Thermal-coal prices continue to rise on supply concerns and as the Russia-Ukraine war reinforces the need for energy security," states a recent report from Morningstar. "The impending EU [European Union] ban on Russian imports is another factor supporting thermal-coal prices." Thermal coal is used to fuel electricity generation.
It's also true that while Europe wants to stop using fossil fuels as fast as possible, the supplies of energy from much-vaunted renewable sources, such as solar, wind, and wave, cannot fill the gap left by Russia. Ironically, the world is fast turning back to coal.
But how long will this need for coal last? Certainly not forever, says Art Hogan, chief market strategist at B. Riley Wealth. "The energy transition hasn't been halted; it has just been paused," he says.
In the short term, coal will be a necessity for many countries. But there will be a push for U.S. companies to learn to export more natural gas to Europe. While the U.S. has vast underground deposits of natural gas and the technology to extract it, exporting it is tricky,
Nothing will change fast. It's unlikely the West will get chummy with the Kremlin if peace breaks out between Russia and Ukraine. The global energy ecosystem would need time to adapt. "The supply-demand balance will take a few years to rectify," Hogan says.
That also means Glencore has a few years to benefit from the likely elevated coal prices.
Write to Simon Constable at reports@wsj.com
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$(END)$ Dow Jones Newswires
August 19, 2022 21:31 ET (01:31 GMT)
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