Glencore IPO: Good or Bad? And What Does It Mean?

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Commodities, M&A Activity

Commentators have been trying to read the runes as to what the timing of Glencore’s IPO means for the commodities markets and, naturally enough, questions have been asked as to whether Glencore, the world’s most successful trader, is calling the top on the market. Looking even more broadly, some are asking: is this the endgame for trading companies? In a globalized information age, does this mean traditional trading companies relying on their often unique breadth of market knowledge cannot make a viable margin anymore?

Well, yes and no, we can rather unhelpfully say, depending on how you phrase the questions. Certainly, Glencore as a traditional trading company ceased to exist a decade or more ago as it began to vertically integrate into mining, processing and what would be called supply chain management among manufacturing companies. Glencore is today more of a mining and manufacturing company than a traditional trading company. Yes, it still speculates with metals positions; witness its recently revealed dominant position in the lead market, but much of the firm’s profits come from the bulk mining, processing and smelting of metallic ores, with growing contributions from hydrocarbons (particularly oil and coal) and agricultural commodities. The traditional trader’s role started to decline with the onset of the Internet — although not just due to the Internet — in the 1980s and margins have been under growing pressure as the world has been progressively more interconnected. So we have to look at what Glencore is today and the markets in which it operates in order to understand what is motivating their IPO at this point in time.

Glencore is not competing with other traders like Noble or Cargill, highly successful as those firms are, but rather with the major miners such as BHP, Vale and Rio. To compete with firms of that size, Glencore needs access to shareholder funds in the billions, not the millions or hundreds of millions available to them as a privately held company. Nor are the current partners looking for a quick buck, although they will be becoming fabulously wealthy in time. While the exact details are not clear, it is widely understood that they are locked in from selling their shares for up to five years, hardly a call on the market peaking this year.

So what will a publicly owned Glencore do that a privately owned one could not? It is widely expected they will buy out much or all of the remaining shares in Xsrata that they don’t hold before the year is out. That would catapult them into the big boy league and even with the current IPO valuation will put them into the FT Top 100 on the UK stock exchange from Day One of trading. It is widely believed they will also go for a larger, controlling share in Kazzinc, although the government may still want to remain a significant minority shareholder. Those two acquisitions would make Glencore a major player in ferrochrome, coal and zinc, markets it already has a significant presence in, but does not wholly own the assets. But what they are probably looking to medium term may well be becoming a major iron ore and/or agricultural producer to rival the established players.

Do we see this IPO as positive? Yes; and also inevitable. It is a natural progression in Glencore’s journey from trader to miner/processor. With their market knowledge, they are arguably better placed than established miners to take on the big boys and thrive. With a listing under their belt, they will have the financial muscle to do it.

–Stuart Burns

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