What Ails Glencore Ails the World Economy as Supercycles Reverse

  • End of easy money, fast China and commodities boom hurt
  • Glencore IPO seen as bellwhether for commodity surge

Is a canary for the global economy to be found down one of Glencore Plc’s mines?

The trader’s predicament echoes the troubles threatening global growth: A slowdown in China, the looming end of easy money and the reversal of a decade-long commodities boom.

“It’s easy to see strong links between the commodity and the credit cycle of the past decades,” said Alberto Gallo, head of global macro credit research at Royal Bank of Scotland Group Plc.

Glencore binged on credit and benefited from the surge in commodity prices that was propelled by demand from China. That may leave it as a bellwether; Ed Yardeni, president of Yardeni Research Inc., notes that the company’s $60 billion initial public offering in May 2011 coincides with the end of the commodity bull run.

The Swiss-based company shed almost a third of its value on Monday as investors took fright at its debt burden amid waning demand for raw materials. While its stock has erased that loss it’s still down about two-thirds this year.

After years of expansion, Glencore is now the world’s biggest exporter of power-station coal, with more than 30 mines in Australia, Colombia and South Africa. It is among the top three agricultural exporters in Russia, the European Union, Canada and Australia. It also controls and trades more than 150 mining and metallurgical, oil production and agricultural assets and employs about 180,000 people in more than 50 nations. It handles about a fifth of wheat’s seaborne trade.

Such power means Glencore carries economic heft. As it declares itself on its website, “our business activities make a significant contribution to the national and local economies in which we operate.”

It risks now becoming a significant drag. In Zambia, Africa’s second-biggest copper producer, for example, the suspension of operations at its mine for 18 months may result in as many as 3,800 losing work. The company said on Wednesday it will cut a further 340 jobs in South Africa as it shutters depleted coal mines.

For RBS’s Gallo, Glencore is the “tip of the iceberg” as the recent drivers of global growth reverse.

“The commodity and credit supercycles of the past decades are broken,” said Gallo, identifying Brazil and Australia as economies at risk.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE