Cargill Withdraws From Coal, Europe Power Markets After Slump

Mar 27, 2014 5:49 pm ET

March 28 (Bloomberg) -- Cargill Inc., the largest closely held U.S. company, will stop trading in European power and natural gas and global coal markets after oversupply and slowing demand dragged down prices.

“Significant changes in the coal and European power and gas markets have led Cargill ETM to withdraw from these two sectors,” the company said yesterday in a statement. It will maintain its oil, petrochemicals, steel, marine freight and North American gas and power businesses.  

Cargill, whose main focus is on agricultural markets, isn’t alone in pulling back from energy fuels. Financial institutions including Bank of America Corp. and Deutsche Bank AG have shut European energy-trading units the past two years as the economic slowdown curbed use of coal and gas. Utilities EON SE and RWE AG have also retrenched, cutting staff as power-plant profits sank.

The closing of the two Cargill trading desks will cause a “small number” of job reductions, Louis de Schorlemer, a company spokesman, said by telephone. He declined to comment on how many staff would go, saying only that “it is limited.”

European gas demand is about two-thirds of that in the U.S., according to BP Plc data. Gas futures in the U.K., Europe’s largest market for the fuel, have fallen 31 percent since September 2008 and the front-month contract yesterday traded near to its lowest level since July 2012.

Riskier Trading

“It’s been a fairly bearish time,” said Trevor Sikorski, head of gas, coal and carbon at Energy Aspects Ltd. in London. While fuel demand has waned, price swings caused by increasingly unpredictable weather can also make gas and power trading riskier than some other commodities, he said.

Cargill has energy and coal desks in Geneva, Singapore and Minneapolis. “We’ll be reassigning a number of those employees into other businesses within Cargill,” De Schorlemer said.

Coal for next-year delivery to Amsterdam, Rotterdam or Antwerp, the European benchmark, has declined for three years to trade near the lowest since 2009. Mining and trading company Glencore Xstrata Plc said yesterday it will suspend steelmaking- coal production at its Ravensworth mine in Australia in September.

Cargill said in January its energy operations had “weak” results in the previous quarter even as total net income rose 36 percent. Last month, the company replaced a senior trader while disputing some details in a report that alleged it lost at least $100 million in energy trading.

Power prices in Germany, Europe’s largest electricity market, have fallen for three years, the longest decline since at least 2002.

Sugar Partnership

Cargill also is taking steps in its business that trades sugar, a market in which prices also have fallen for three straight years.

In a separate announcement, the company said it will combine its sugar trading activities with Copersucar SA, a cooperative of Brazilian mills that became the world’s largest trader of the sweetener.

Cargill and Copersucar each will own half of the venture that will sell refined and raw sugar, the Minneapolis-based agricultural company said in a statement yesterday. The venture will trade sugar from Brazil and other major producers including Australia, Thailand, India and Central American countries.

“This creates some good economies of scale,” Sterling Smith, a Chicago-based futures specialist focused on agricultural commodities for Citigroup Inc., said in an telephone interview yesterday. “It’s the economic drive to get the best return on capital you can find.”

The ethanol division of both companies will not be included in the joint venture. The approval of the partnership by antitrust authorities is expected by the second half of this year, Cargill said in the statement.

Bunge Ltd. said on Feb. 13 it has hired Morgan Stanley as an adviser while the agricultural commodity processor reviews the future of its underperforming sugar and ethanol unit in Brazil.

--With assistance from Marek Strzelecki in Warsaw and Anna Shiryaevskaya in London.