Johannesburg - Four years ago, Glencore held an initial public offering that made several of its employees billionaires.
Now, with the so-called commodities supercycle an increasingly distant memory, the trading company finds itself squeezed by lower metals and energy prices and concern about Chinese growth.
The shares plunged 29 percent on Monday while the cost of insuring the Swiss company’s bonds against the risk of default soared. A $10 billion debt-reduction plan announced earlier this month hasn’t done enough to allay concern about the risks posed by a debt pile that mushroomed following years of acquisitions.
It’s a big come-down for the world’s largest publicly listed commodity trader, which handles and ships billions of dollars of raw materials to and from almost every corner of the globe, and is a top producer of many key metals. Even so, Glencore’s woes aren’t likely to pose the type of systemic risk that would trigger significant adverse effects on the real economy, said Craig Pirrong, a professor at the University of Houston who has studied the issue.
What is Glencore?
Already an established commodity trader, since acquiring Xstrata for $29 billion in 2013, Glencore has also been the second-biggest copper refiner, the top producer of zinc outside China and one of the biggest suppliers of nickel. The company also produces lead, cobalt and aluminum, and is one of the largest traders of oil and wheat. Its shares began trading in London and Hong Kong in 2011.
Why wouldn’t Glencore’s woes affect the economy?
“Glencore is big for a commodities trader, is not that big compared to a major bank,” said Pirrong, who wrote a 2012 report titled “Not Too Big to Fail” about commodity traders. “Glencore is really more a mining firm than a commodities trading firm. And big firms can go bankrupt, which causes pain to their creditors but typically no creditor is going to be so exposed that their financial viability is going to be threatened. The contagion effects are limited.”
What are the company’s origins?
Belgium-born trader Marc Rich founded Marc Rich & Company in 1974 in Switzerland, where he avoided extradition to the US on charges of tax evasion and doing illegal oil deals with Iran. Rich, who was credited with inventing the modern oil market, remained a fugitive for decades before he was pardoned by Bill Clinton on the president’s last day in office in 2001. His company was transformed into Glencore in 1993 through a buyout by a management team that included current CEO Ivan Glasenberg.
Who is Ivan Glasenberg?
Since becoming CEO in 2002, the 58-year-old helped transform the company from a commodity-trading house into a diversified mining group. He’s the second-biggest shareholder with an 8.4 percent stake. His fortune, which was estimated at $7.3 billion in July 2014, fell to $1.4 billion at the close of trading Monday, according to the Bloomberg Billionaire Index.
How does Glencore make money?
Of its $4.6 billion in first-half 2015 earnings before interest, taxes, depreciation and amortisation, 74 percent came from mining, energy and agriculture, and 26 percent from trading.
How have shareholders fared?
The stock has lost 87 percent on a total-return basis since it began trading in May 2011, compared with a 65 percent decline in the MSCI World Metals & Mining Index. Most of the losses have come in 2015. The stock is the worst performer on the UK FTSE 100 Index this year, falling 77 percent.
What’s the trading risk?
An erosion of Glencore’s credit rating could impact its trading. While futures involve an exchange clearinghouse that guarantees trades, counterparties in other transactions may demand Glencore add collateral to back contracts if its credit rating deteriorates. However, because Glencore is a producer of raw materials, many of its positions may be designed to provide protection from a drop in prices. If so, they probably increased in value during the slump. Glencore’s impact on the rest of the market may not be big. Over-the-counter commodity swaps contracts had a notional value of $1.9 trillion at the end of 2014.
What else is at risk?
Equity holders may be left with little value unless commodity prices recover, Investec said in a report on Monday. And of course, any bondholders stand to lose out too. Beyond that, any analysis of whether problems at the trader might create systemic risk probably would focus on financial companies that are trading partners. The failure of big commodity traders is “not analogous to Lehman in any way,” Pirrong said. “Glencore or these other companies are moving not because there is a contagion but because they are all affected by the same bad fundamentals.”
How much debt does Glencore have?
As of June 30, the company reported net debt of $29.55 billion.
Who regulates the company?
There’s no national or supranational entity regulating commodity-trading companies, according to Pirrong. Still, some of Glencore’s activities are subject to supervision by regulators. For instance, its American futures trading falls under the jurisdiction of the US Commodity and Futures Trading Commission. The Financial Conduct Authority provides the same role in the UK.
Who are Glencore’s competitors?
Competitors include energy traders Trafigura Beheer BV, Noble Group, Vitol SA; copper producers including Chile’s Codelco, Freeport-McMoRan, BHP Billiton and Rio Tinto; zinc suppliers like Korea Zinc Company, Nyrstar NV, and Brazil’s Votorantim Industrial SA.
* With assistance from Juan Pablo Spinetto in Rio de Janeiro, Matthew Leising in New York and Jesse Westbrook in London
BLOOMBERG