In a shocking move, the world’s largest producer of thermal coal, Glencore (LONDON:GLEN), announced yesterday that it will shut down its Australian coal operations for three weeks starting in mid-December.
An estimated 5 million tonnes of output (roughly 6% of Glencore’s annual Australian coal output) will be cut from the markets as a result.
Seaborne thermal-coal prices remain at 5-year lows as huge production growth from the likes of Glencore, Bhp(LONDON:BLT) and Rio (LONDON:RIO)have created a sustained supply glut. The price per tonne of thermal coal was US $120 in 2011 and now hovers around US $65 per tonne.
“This is a considered management decision given the current oversupply situation and reduces the need to push incremental sales into an already weak pricing environment,” Glencore said in a statement.
The Baar, Switzerland-based commodities giant reported earlier this month that it increased coal output by 9.2% in the third quarter. Most of this growth came from their Australian thermal coal mines. They are the largest exporter of coal in Australia.
Glencore has 13 Australian mine complexes (including about 20 mines) and employs about 8,000 staff. Glencore produced 81 million tons of coal from their Australian businesses last year.
The decision to eliminate this amount of production speaks to how distressed some of their mines are, although the entire business unit is profitable (according to the latest quarterlies). They are cornerstone partners on a few large and troubled coal development projects including the Wiggins Island export terminal.
The move is being viewed by some as a challenge by Glencore’s President, Ivan Glasenberg, to iron ore majors like BHP and Rio, whom Glasenberg has attacked for expanding iron ore production despite a falling commodity price, intensifying the supply glut.
Many have viewed the attacks by Glasenberg as hypocritical given that Glencore has been expanding its coal production even as the coal price continues to fall.
Glencore is forecasting total managed coal production of 168 million tonnes this year, beating its previous record of 157 million tonnes set last year. This will obviously be lower after the 3 week shut down in December.