August 22, 2012

Glencore's H1 2012 earnings down 8% on falling prices

In the first half of 2012, Glencore International reported an 8% drop in earnings on August 21, due to falling prices and global economic weakness.

Glencore said its net profit from January-June of this year was US$2.275 billion, a drop from the US$2.474 billion reported for the first half of 2011. Revenues of US$108 billion were up 17% from the US$92 billion reported for the same period last year.

"Financial markets were relatively optimistic entering 2012, following the sovereign debt-related challenges experienced during the second half of 2011. This optimism generally faded as the half progressed and, with it, expectations for economic growth and commodity prices," said Chief Executive Officer Ivan Glasenberg.

"Concerns over how precisely the European situation would and could be resolved have continued to erode global risk appetite. For the world's two most important economies, the US and China, 2012 is essentially a year of political transition. Each of these factors extends into second half of 2012 and is likely to continue to hinder the gradual process of underlying economic recovery following the 2008 financial crisis."

Glencore announced on March 19 that it will acquire Viterra Inc., subject to regulatory and shareholder approvals. Viterra's shareholders voted to approve the acquisition on May 29. Substantially all regulatory approvals have now been received, including competition and foreign investment clearances in Canada and Australia. The only outstanding approval remaining is MOFCOM, China.

A decline in average prices for many key commodities was mostly offset in the first half of the year by strong sales of metals, minerals and agriculture, Glencore said.

Glencore reported EBIT of US$103 million, an increase from the US$75 million reported last year, for its agricultural products sector.

Grain prices were directionless and range bound in first half 2012 and, for most of the period, were below the price levels of second half 2011 and well below price levels of first half 2011. Oilseed prices, having reached a low early in the year, subsequently increased as Argentine production fell short of expectations due to an extended drought for the second year in the past three years. Cotton prices were also subdued, considerably below 2011 levels and gradually weakened over the period.

At the end of first half 2012, a drought in the US, FSU and Eastern/Southern Europe began to impact both grain and oilseed production forecasts and increase prices. Subsequently, with continuing dry and hot weather, particularly in the US, it has become apparent that production shortfalls will be severe and supply/demand will consequently be extremely tight, Glencore said. Second half 2012 is therefore likely to be a considerably higher priced and more volatile environment than first half 2012.

The EU biodiesel business continues to be very challenging with new capacity coming on stream in 2012 despite poor margins. Imports of soy based biodiesel from South America have eroded EU biodiesel demand as has an effective reduction of the EU biodiesel use mandate.