Glencore International Plc’s debut today in Hong Kong in the world’s biggest initial public offering this year may tempt investors to switch from rival Asian commodity traders.
Glencore, based in Baar, Switzerland, began trading in London last week and has a market value of $58 billion, making it the world’s biggest listed trader of commodities by capitalization, surpassing Japan’s Mitsubishi Corp. (8058) Its size has won it fast-track entry to seven FTSE indexes including the benchmark FTSE 100. The Hong Kong IPO may herald more.
The trader fell 2.5 percent in Hong Kong, reflecting declines in commodity prices since Glencore raised $7.9 billion in its London IPO on May 19. Noble Group Ltd. (NOBL), the Hong Kong- based commodities trader that Glencore names as a rival in its prospectus, has fallen 3.4 percent since the same date even after posting record earnings a week earlier.
“The market was concerned that funds might switch” from Noble to Glencore, said James Koh, an analyst with Kim Eng Holdings Ltd. in Singapore, who said some of his clients have asked about the possibility. “People may want to switch as the latter is five times bigger” and has “improved financial muscle from the IPO. But it’s not a mutually exclusive trade.”
Glencore closed at HK$64.90 in Hong Kong. The MSCI World Index of global equities has dropped 2.3 percent since May 19.
“All the markets are off around the world,” Chief Executive Officer Ivan Glasenberg said in Hong Kong today. “We are still bullish on commodities. Of course, China may contract or slow down, but the demand for commodities still continues.”
The Swiss trader, which deals in materials including coal, oil and grain, broke with more than three decades of operating as a closely held partnership in its IPO. Twelve cornerstone investors bought shares, including Abu Dhabi’s Aabar Investments PJSC and BlackRock Inc. (BLK)
The two BlackRock funds with the biggest number of Noble shares, accounting for 1.56 percent of the energy, metals and food supplier, sold about 3 percent of their stock in April, according to the latest filings tracked by Bloomberg. BlackRock, the world’s biggest listed money manager, owns at least 1.5 percent in each of Japan’s six traders, with its holding in Marubeni Corp. (8002) at 6.8 percent, according to the filings.
Noble Group CEO Ricardo Leiman said he isn’t concerned over a listed Glencore as the companies already compete for assets.
“We very much welcome a large number of peers that are comparable to us to a certain degree, which we think will be quite beneficial to bringing a new set of investor” to the industry, Leiman said this month on a conference call.
Glencore’s market value alone is enough to force investors to watch the stock, said Alex Au, the Hong Kong-based managing director of Richland Capital Management Ltd., which oversees about $300 million of assets.
“I don’t think it’s very attractive but because of its market cap and it going into the index it would generate a lot of interest,” Au said. “You can partly compare it to Noble, but I would say Glencore is more like a commodity play rather than a trading company. And the scale is very different.”
Noble posted $606 million in net income for 2010 compared with Glencore’s $3.76 billion. The Swiss trader’s profit margin was 2.56 percent, compared with Noble’s 1.07 percent. Mitsubishi’s net profit for the fiscal year ending March 31 was $5.42 billion, with a margin of 8.9 percent.
“It’s definitely attractive,” said Masahiko Ejiri, a Tokyo-based fund manager at Mizuho Asset Management Co., which oversees $41 billion, including shares of Hong Kong and Chinese companies listed in the city. “It’s a leading company with strong business and track record. But, the sector is very cyclical and I’m not sure if this is the best time” to invest, Ejiri said, adding he doesn’t plan to buy Glencore now.
Commodities had the sharpest pullback in prices in two years last month amid concern economic growth may slow. The Standard & Poor’s GSCI index of 24 commodities has lost about 9 percent since Goldman Sachs Group Inc. told investors on April 11 to sell holdings in the segment. Goldman said yesterday it had turned “more bullish” on commodities, spurring a rebound.
For Asian investors to switch to Glencore, the Swiss company will need to show how it can make more money trading the same commodities as its rivals, said Ben Collett, head of Japan equities at Louis Capital Markets HK Ltd. The Hong Kong portion of Glencore’s IPO accounted for 2.5 percent of the total offer.
“Whenever a new stock enters the sector, other stocks are sold or there is a re-jigging of the sector allocations,” Collett said. “I don’t think that will be discernable now in the Japanese traders but, after a period of time and trading history, Japanese investors who can invest abroad may look at Glencore and the swap trade may look attractive.”
A pre-IPO report on Glencore by analysts in London at Sanford C. Bernstein & Co. described the company as midway between a miner such as BHP Billiton Plc or Xstrata Plc (XTA) and a trader like Noble or Itochu Corp. (8001), Japan’s No. 4 trading house.
“It has attained a relatively unique position as a firm that straddles both the mining and trading industries as a major global player,” Bernstein analysts Paul Galloway and Jodi Morgan wrote in the May 6 report.
The Japanese sales desk at MF Global FXA Securities disagreed, saying in a note to clients that the Swiss trader has more debt and lower profit margins than Japan’s biggest traders, Mitsubishi, Mitsui & Co., Sumitomo Corp. (8053), Itochu and Marubeni.
“Both Glencore and the Japan traders make money in metals, mining, energy and food,” MF Global said May 23. “They both have upstream as well as trading activity. Glencore is not more complex than the traders and not more difficult to value.”
There’s no evidence to show Glencore has stronger finances or better assets, MF Global said in the report.
A listing alone wouldn’t make Glencore a familiar name for Asian investors, said Ken Morrison, a former grains trader with Cargill Inc., who spent about nine years working for the closely held U.S. food commodity supplier in Singapore and China.
The Swiss company will need to expand staff in Asia and work on relationships to ease business, Morrison said by phone from St Louis, Missouri, where he now consults on grain trading. It may also face heightened rivalries with suppliers should it pursue expansion in producing assets, he said.
Glencore has about 14 percent of its staff in Asia, or 400 people, according to its prospectus. Glencore doesn’t break out Asia in revenue generation, lumping it with Africa, the Middle East and Australia for 40 percent of total sales.
For now, Glencore’s IPO has probably given more publicity for Noble and other Asian commodity suppliers, said Tanuj Shori, an analyst with Nomura Holdings Inc., whose clients have also asked how the companies compare. “The IPO means more and more people will want to get to know how Noble is,” Shori said.
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