- Trading firm founded by Marc Rich now earns mostly from mines
- Risks for rest of the economy are likely limited, Pirrong says
Four years ago, Glencore Plc 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 Monday while the cost of insuring the Swiss company’s bonds against the risk of default soared. A $10 billion debt-reduction plan announced this month hasn’t done enough to allay concern about the risks from a debt pile that mushroomed following years of acquisitions. While Glencore’s statement Tuesday that it remains financially robust boosted the stock by the most ever, it’s still this year’s worst performer on the U.K.’s FTSE 100 Index.
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. 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 Plc 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.
The stock rallied as much as 22 percent on Tuesday as the company said it has “absolutely no solvency issues,” good liquidity, strong credit lines and secure access to funding. The shares rose earlier in the day as analysts said the recent rout probably didn’t reflect the company’s true value and Citigroup Inc. wrote that management should consider taking the company private.
Would Glencore’s woes affect the economy?
“Glencore is big for a commodities trader, 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 & Co. in 1974 in Switzerland, where he avoided extradition to the U.S. 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 amortization, 74 percent came from mining, energy and agriculture, and 26 percent from trading.
How have shareholders fared?
The stock has lost 85 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. It traded at 80.17 pence by 3:28 p.m. in London, down 73 percent this year.
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 Plc said in a report 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 U.S. Commodity and Futures Trading Commission. The Financial Conduct Authority provides the same role in the U.K.
Who are Glencore’s competitors?
Competitors include energy traders Trafigura Beheer BV, Noble Group Ltd., Vitol SA; copper producers including Chile’s Codelco, Freeport-McMoRan Inc., BHP Billiton Ltd. and Rio Tinto Plc; zinc suppliers like Korea Zinc Co., Nyrstar NV, and Brazil’s Votorantim Industrial SA.
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.