Wednesday, May 4, 2011

Glencore trading empire unveiled

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By Javier Blas in London
Published: April 14 2011 19:34 | Last updated: April 14 2011 19:34
The commodities world knew Glencore was the biggest market participant, but few were aware until now of the true scale of the Switzerland-based company’s operations.

As Glencore announced on Thursday its intention to become a public company within a month, it revealed some of its most closely guarded secrets: the dominant market share of its vast trading activities. In some cases, including zinc and copper, Glencore told investors it controls more than half of the so-called third party market.
Although its share of the overall market is lower, traders focus on the third-party market as their most relevant yardstick as it measures the volumes that can be traded freely, outside long-term agreements between suppliers and consumers.
The reach of the trading business comes to light as commodities, which for most of the 1980s and 1990s were a backwater sector, emerge as crucial for the global economy as demand and prices rise on the back of the industrialisation of emerging countries.
Glencore disclosed that it controls 45 per cent of the third-party lead market, 38 per cent in alumina, and between 30 and 20 per cent for aluminium, cobalt and thermal coal. It has a smaller market share for nickel, ferrochrome, oil and grains. The sheer dominance of raw materials trading is set to play into Glencore’s favour as it pushes for a 15-20 per cent stake sale worth $9bn-$11bn in London and Hong Kong.


Man in the News: Ivan Glasenberg - Apr-15

Editorial comment: Raw material world - Apr-15

Glencore lifts veil on market dominance - Apr-15

Lex: Glencore: hark the hyperbole - Apr-14

Advisers poised to make $275m - Apr-14

Murray heads Glencore’s all-star board - Apr-14

Glencore itself highlighted it on a regulatory filing to the London Stock Exchange, saying that it believes that it is “the world’s largest physical supplier of third-party sourced commodities in the majority of the metals and minerals markets”. But it will also exacerbate the fears of rivals – and some suppliers and consumers of raw materials – who worry about the trader’s ability to influence prices. The concerns will intensify if the company, as many bankers, industry executives and analysts expect, moves to take over Xstrata, the London-listed miner in which it owns already a 34 per cent stake, or a rival commodities trading house.
“I think that a merger [between Glencore and Xstrata] is possible before the end of the year,” a banker close to both companies says. “It is the natural evolution,” he adds.
Ivan Glasenberg, Glencore chief executive, told the Financial Times earlier this week that a combination between Glencore and Xstrata made sense, although he insists no deal is on the table but that a disagreement about valuation has so far prevented the deal. Mr Glasenberg also says that Louis Dreyfus Commodities, the Geneva-based agricultural trading house looking itself for a merger, sale or an IPO, can be a good combination for Glencore’s relatively small grain business.
The company’s increasing openness, forced by its initial public offering which could value it at $60bn, moves it further away from its roots under Marc Rich, the oil trader who founded Marc Rich & Co in 1974 but sold out to management in 1993-1994 for about $600m. In 1983, Rudolph Giuliani, then a US prosecutor, indicted Mr Rich for tax evasion and he became a fugitive in Switzerland. On his last day at the White House in 2001, President Bill Clinton pardoned Mr Rich.
The association with Mr Rich, while severed long ago, has added to the company’s reputation as a canny, hard-hitting but publicity-shy player in commodities.
The main difference that will now emerge with rival traders such as Vitol in energy or Bunge in agriculture, is that Glencore will no longer be a middleman that just buys and sells commodities and profits from small price discrepancies, but a vertically integrated natural resources company. As such, it markets its own production, besides buying and selling from third parties.
“The integration across the value chain is key,” says an analyst who participated on Glencore’s educational two-day seminar last month. Bankers believe that about a third of Glencore’s worth – estimated between $55bn and $70bn – lies in its trading business, with the rest in its industrial assets.
The intention-to-float filing also lifted the veil on Glencore’s unlisted production assets, revealing that the trader has reached a scale akin to some medium-sized FTSE 100 miners.
Bankers say the surge in production this year in Africa (copper), Colombia (thermal coal) and Kazakhstan (gold) will lift the company’s net profit to a record $6.5bn, up 70 per cent from last year’s $3.8bn.
Glencore says that its copper production in Africa will jump to 370,000 tonnes this year, up by nearly a half from just less than 250,000 tonnes in 2009. By the middle of the decade, the trading house expects to mine more than 650,000 tonnes.
On coal, Glencore told potential investors that its production would jump to 15.6m tonnes this year, up more than 56 per cent from 10m in 2010. By 2015, the trader hopes to mine 20.7m tonnes. In spite of the vagaries of the commodities markets, one fact is clear. The move to become a public company will now give Glencore the financial muscle to shape its own, and its rivals’, destinies.

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