Glencore tanks 8%, results hit by commodity rout, China

Reuters with CNBC.com
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Glencore shares slumped 7.8 percent after the miner and commodities trader posted a 29 percent fall in first-half earnings on Wednesday on sliding metal and oil prices.

Glencore, whose trading division has until recently provided some insulation from the global commodities rout hammering other miners, said adjusted earnings before interest, tax, depreciation and amortization (EBITDA) was $4.6 billion.

The company, which is based in Switzerland and listed in London, said this month it would take a $790 million charge on oil assets in Chad due to a steep fall in oil prices.

A logo sits on a sign outside Glencore Xstrata Plc's headquarters in Baar, Switzerland.
Gianluca Colla | Bloomberg | Getty Images

"These (earnings) are pretty much what we expected," Paul Renken, senior geologist in the mining research team at VSA Capital told CNBC on Wednesday.

"We knew that the prices for all these commodities they are selling for the most part are down quite a lot, just in the last three or four months or so. So it didn't particularly surprise us."

Glencore's stock hit a record low of 161.50 pence on Wednesday, continuing this week's slump, which has been driven by the ongoing rout in commodity prices. This is less than a third of its debut price of 530 pence in 2011.

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The shares are down about 45 percent so far this year, underperforming other global miners such as Rio Tinto and BHP Billiton, and compared to a 26 percent fall in the FTSE 350 mining index.

Oil prices are down because of a supply glut and both Brent and U.S. crude have lost more than half their value from a year ago.

Coal prices, another major commodity for Glencore, have also been weak and the sector shows no signs of reversing its own supply glut.This, combined with expectations of shrinking demand from China, paints a bleak outlook.

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Furthermore, the price of copper, Glencore's largest earner, is at six-year lows weighed down by a slowdown in China, which is one of the world's biggest consumers of metals and other raw materials.

"The oversupply in most commodities remains and the slowdown in China is very important," Daniel Lacalle, CIO of Alpha Strategy told CNBC on Wednesday.

"But definitely, there is an element of excess selling and there is definitely some value out there that you can start to look at if you have a longer-term perspective."

Faith in capex cuts?

The company said last week it would trim capital spending for 2015 to $6 billion from the $6.5 billion to $6.8 billion range announced in February.

It said on Wednesday that capital spending next year was expected to be no more than $5 billion.

Glencore makes about a quarter of its earnings from commodities trading, which had previously allowed it to withstand the steep fall in oil and metal prices slightly better than pure play miners.

However, earnings from its marketing division fell 27 percent to $1.2 billion, due to tough metals' trading conditions.

"We have a lot of faith in capex (capital expenditure) cuts and cost savings, but historically they have never transpired to keep margins and profits at a decent level," Lacalle told CNBC.

"So I think the market needs to see reassurance. It needs to see three quarters of stable commodity prices and at the same time, see that those capex cuts and cost savings are actually coming through in the P&L (Profit and Loss Statement).

—By Reuters with CNBC's Katy Barnato.