Glencore Shares Plunge, Structural Debt The Problem

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Glencore shares plunged on Monday as much as 32% during the afternoon. Shares of the company are now down near 80% on the year-to-date.

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Shares crashed after one investment bank, Investec, warned of how high risk is for Glencore’s earnings outlook, saying that if commodity prices don’t recover, Glencore could end up solely working to repay its debt obligations.

Glencore stock 1 year out

Glencore stock 1 year out. Source: Stockcharts.com

Chinese Construction Collapse

After the global financial crisis of 2008, China launched a massive economic stimulus program, investing in housing, public infrastructure and rural development projects. In response, Glencore and other miners, via the cheap debt of the time, raced to increase production to take advantage of China’s expansion program.

But mines take a long time to build, and what miners didn’t know is that soon after these new mines could start producing, China’s economy would start slowing. In particular, this year we are witnessing the consequences of all that excess capacity built over the past 3 years.

Glencore is aware of the problem. The company already announced a series of measures that would, in theory, reduce its nearly $30 billion in debt by a third. One of the measures included selling nearly $2 billion worth of inventory. Unfortunately for Glencore, weak Chinese demand and sinking prices for commodities such as copper and zinc, minerals that are crucial to the company’s earnings, are causing the miner headaches when it comes to boosting investor confidence.

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Further commodity weakness will challenge Glencore’s ability to pay back its debt and the recent crash in the value of its shares is telling us that investors are not very optimistic about a recovery for commodity prices.

 

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