Glencore: how did it go so wrong, again?

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In the spring of 2011, when the commodities trading giant Glencore was on the verge of floating on the London stock exchange, media outlets received a pointed communiqué from one of the company’s law firms.

The correspondence, mailed by “reputation management experts” Schillings, stated that Glencore’s bosses were “extremely private individuals” and that any reports about their homes or private lives would pose a “security risk”. The implication was that the freshly revealed wealth of these previously obscure businessmen created a kidnap risk. It was easy to see why.

Glencore was the biggest stock exchange float in British history, so large that it became the first newly floated company to be fast-tracked into the FTSE 100 since the major privatisations of the 1980s. The listing created paper billionaires out of the firm’s boss Ivan Glasenberg and his four key lieutenants: Daniel Maté, Telis Mistakidis, Tor Peterson and London-based Alex Beard. Glasenberg’s £6bn paper fortune meant he had become so rich that his 3,600 neighbours in the Swiss village of Rüschlikon got a tax cut.

Still, if leaking the addresses of the Glencore billionaires might have put these men and their families at risk in 2011, you might argue they would be doubly exposed now. Having presided over a company that has lost investors 87% of their stakes – which equates to more than £30bn vanishing from the coffers of investors such as the UK pension funds compelled to buy the shares – there must be plenty keen to tap on Glasenberg’s door to ask: how did it go so wrong?

The more nuanced question, perhaps, might be: how did it go so wrong, again? Because this is hardly Glencore’s debut when it comes to financial crises. Some in the City wonder if its audacious business model only works when the markets play ball.

For example, at the height of the credit crunch in 2009, Xstrata (the miner that was then 35% owned by Glencore) needed £4bn and launched a rights issue to raise the cash. Glencore was required to stump up around £1.4bn to avoid having its stake diluted, but was struggling to finance the purchase. So, Xstrata controversially arranged to buy Colombian coal mines from Glencore in order to help its main shareholder raise the funds to participate.

That was hardly its first tight spot. Back in 1993,a disastrous attempt to corner the world zinc market cost Glencore $172m (£113m) and almost bankrupted the company. The losses forced its fugitive founder Marc Rich to relinquish control of the firm and sell it to his inner circle, a group that included Glasenberg.

Glasenberg eventually became the firm’s boss and accumulated considerable wealth, although as the company’s largest shareholder he has shared some of the financial pain. His stake – worth £6bn at the float – is now valued at less than £1bn, although the billionaire has been paid almost $800m in dividends since 2011.

So what has triggered the crisis this time? Certainly, a stuttering Chinese economy has meant less demand for many of the commodities that Glencore produces and trades, leading to falling prices that have hit all its rivals.

But the group’s flotation pitch - that its trading arm combined with its mining business would partly insulate it during the difficult years - has not worked, at least not well enough to assuage investors’ fears that the extra debt required to keep the hybrid structure running adds to the risks.

Meanwhile, Glasenberg’s perceived arrogance has irked and magnified his misjudgments on how the financial markets might move.

In 2014, when unveiling what now looks like a massively over-confident initiative to spend $1bn buying back Glencore shares, Glasenberg said: “The supercycle ain’t over, China is still buying, demand for commodities hasn’t tapered off, it’s even higher than it’s ever been.

“The demand is pretty good. We’ll grow. We may do acquisitions where you’re not creating more supply in the market.”

The group was also bullish enough to force through the 2013 takeover of Xstrata after initial resistance from the target’s shareholders. Glasenberg even had to call on the services of the former UK prime minister Tony Blair in order to persuade Qatar Holding, Xstrata’s largest investor, to back the deal.

It all looks very different now, although the company refuses to comment publicly on its slumping shares. Privately, Glencore’s aides insist the firm is stable and talk about continuing to implement “its debt reduction plans”, a programme to cut borrowings by $10bn that was forced on it by shareholders and announced earlier this month.

Still, while it may appear to be good sport replaying some of Glasenberg’s more disastrous mutterings - especially as he was once billed as the world’s smartest trader - it is far from a joke for many.

Frighteningly, there are those expecting it to get worse from here, with analysts openly raising the possibility that a company floated for £37bn in 2011 - which then swallowed the £26bn-rated miner Xstrata - might actually be worth nothing. Meanwhile, it is hardly hyperbole to say that Glencore’s woes are being felt across the globe.

Apart from trading the world’s commodities, Glencore produces large quantities of them. It owns mines and stakes in miners all over the world: extracting copper from the Democratic Republic of Congo; its chrome, platinum and vanadium operations are located across the Limpopo and Mpumalanga provinces in South Africa; while zinc is sourced from Kazakhstan.

The share price fall - and more specifically the efforts to reduce debts by suspending production in Africa - is having actual effects in the wider world.

On Monday Zambia’s currency, the kwacha, went into freefall, as it was hit by general fears about the commodity markets as well as worries that Glencore might further rein in its extensive operations in the country.

The company has already announced plans to lay off more than 3,800 workers due to lower metal prices and high production costs. Another group people you might add to the list of those wanting to queue outside Glasenberg’s front door.

Powered by Guardian.co.ukThis article was written by Simon Goodley, for theguardian.com on Monday 28th September 2015 19.10 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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