Sam Walsh, the mild-mannered Australian CEO of London-based mining giant Rio Tinto Group, insists he remains on cordial terms with Ivan Glasenberg, the brash South African who leads the global mining and commodities trading firm Glencore. Sure, Glasenberg approached Walsh’s boss—Rio Tinto Chairman Jandu Plessis—in July 2014 and proposed a merger that would likely have cost Walsh his job. Sure, Glasenberg doesn’t miss a chance to tell the world that Walsh and his fellow Big Mining executives don’t comprehend the basic economics of supply and demand. Still, Walsh told the Times of London in December, “We’re big boys, and this is business. It’s not personal.”
Except it kind of is. Glasenberg’s argument is that Walsh and his fellow global mining executives “screwed up”—the phrase the commodities tycoon used in 2013—by flooding the world with minerals. Take iron ore, which is responsible for almost half of Rio Tinto’s revenue and more than two-thirds of its pretax profit. Global yearly output for all miners increased more than 25 percent from 2010 through 2014. Over the same period, the price of Australian iron ore exports to China declined 60 percent. That’s not a coincidence, Glasenberg says.
Yet the world’s miners—including Rio, BHP Billiton, and Vale—plan to increase production by an additional 16 percent by the end of 2018. “That’s what’s killing the supercycle,” Glasenberg said on Glencore’s August 2014 earnings call, referring to the idea that commodities prices had been on a decades-long climb due to surging demand from emerging markets, particularly China. Glasenberg’s message to the mining industry is simple: You’re in a hole; stop digging. The problem is, mining execs think they’re in the business of digging. “There’s too much focus on big holes in the ground and not enough focus on return for capital,” says Paul Gait, a mining analyst at Sanford C. Bernstein & Co.
Putting money where his mouth is, Glasenberg has cut production at Glencore’s thermal coal mines. In his Times interview, Walsh defended Rio Tinto’s approach, saying that bigger mines provide economies of scale and have helped make the company among the world’s lowest-cost producers of iron ore. So although increased supply pushes down prices and Rio’s revenue, the company can still turn a profit—while higher-cost competitors are forced out of the market. When commodities prices rebound, Walsh argues, Rio will be in an even stronger position. It’s a long-term strategy that Walsh thinks Glasenberg can’t fathom. “Glencore is a trading company; they’re very short-term in focus,” Walsh told Bloomberg in December. But in a tacit acknowledgment that Glasenberg might have a point, Walsh told an industry conference in Barcelona in May that Rio will curtail its iron ore expansion plans.
There are plenty of reasons a Glencore-Rio merger might never happen, from antitrust concerns to the high premium Glencore would likely have to pay Rio shareholders. Rio rejected Glencore’s initial approach. And in the past year, Rio has boosted its dividend to keep investors happy. But no one in the industry thinks Glasenberg—known as an ultracompetitive, alpha-male dealmaker—is likely to go away for good. Ultimately, says Bernstein’s Gait, the logic of a Glencore-Rio deal isn’t about valuation or business synergies; it’s about Ivan Glasenberg proving he’s right. “Ivan Glasenberg has made a pretty strong claim that he is the smartest man in the room,” says Gait. Sam Walsh might disagree—in a cordial way, of course.
This story appears in the July/August special Rivalry Issue of Bloomberg Markets magazine.