Glencore takes £4.9bn hit on its mining mega-merger

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Weaker growth in China’s powerhouse economy and higher risks around big projects have forced Glencore Xstrata to take a £4.9bn hit on its commodities and mining mega-merger.

Metals prices fell 15 per cent on average during the first six months of the year on global oversupply, the company said, as it booked a 7.7 billion US dollar impairment charge on the goodwill in Xstrata’s mining business.

But the group, which combined Xstrata’s mining operations with Glencore’s commodity trading expertise in May, said the global economy is making “slow but steady progress”, while it continues to slash costs.

Commodity price “pessimism” drove underlying earnings in its mining business 39 per cent lower to £1.3bn during the first six months of the year, but its trading arm saw profits before tax and interest increase 6 per cent year-on-year to £757m.

Across the group, underlying earnings dived 28 per cent to £2bn from £2.8bn a year earlier.

The merger aimed to provide a buffer against volatile commodity prices through its trading business, but revenues dipped 2 per cent to £775bn. Worries over slowing growth in emerging economies such as China and Brazil have weighed heavily on commodity prices in recent months as traders fret over weaker de- mand.

Glencore said South African coal prices fell 15 per cent during the six months, while nickel declined 12 per cent, silver was down 14 per cent, gold fell 8 per cent and copper dropped 7 per cent.

But Glencore boss Ivan Glasenberg insisted China’s growth remains “healthy by any standard”, despite output in the world’s second-biggest economy slowing to 7.5 per cent in the second quarter of the year from 7.7 per cent in the first quarter.

Glencore said the writedown was based on “negative broader macro-economic environment facing the extractive industry, particularly around the actual and perceived heightened risks associated with greenfield and large scale expansion projects during the first half of 2013”.

It also blamed the eight-month time lag between pricing the acquisition in September 2012 and completing it in May.

Mr Glasenberg said Glencore is taking a “disciplined” approach to major investment and has made “excellent progress” integrating the businesses.

Glencore plans cost cuts of more than £320m, and last month it revealed it is halting production of iron ore in Australia, where margins have slumped.

It also recently announced the sale of Australian grain handling business Joe White Maltings to US commodities group Cargill, and is selling its Las Bambas copper mine project in Peru.

“The capital invested by commodity producers over the past decade has dwarfed returns to shareholders,” said Mr Glasenberg.