[miningmx.com] – AT first glance, Glencore’s offer of a merger with Rio Tinto is mystifying given that in a recent presentation following its interim results, the Swiss group had iron ore – which accounts for most of Rio Tinto’s earnings – as the only mineral with a negative price path from 2016.
According to Glencore, prices for the mineral fall steeply from 2014 until 2017 with a slight improvement in 2018. Not even oil performs that badly in Glencore’s view in a slide it titled “A differentiated outlook – exposure to the right commodities’.
So having sold the share on the back of not producing iron ore, it’s idiosyncratic that Glencore CEO, Ivan Glasenberg, should phone up Sam Walsh, CEO of Rio Tinto, at all.
Unless, of course, one agrees with a recent analyst’s report which viewed the approach as purely opportunistic given that Walsh’s contract with Rio Tinto is due to expire at the end of 2015 when he will be 66 years of age.
A couple of years in the public eye, and it’s clear that Glencore likes to stand out from the crowd. Last year, Glasenberg castigated other mining companies for the lack of indiscipline that led to the current over-supply of minerals.
He then earlier this year bucked the popular view that the minerals super-cycle was over by saying it had been merely interrupted, a view that is also held by Mick Davis, founder of X2 Resources.
Glencore is also a bit different in that its marketing division gives it defensive qualities in hard economic times and perhaps Glasenberg believes that in a tough iron ore market, his traders would do a better job of selling iron ore to the Chinese than Rio Tinto manages at present.
Or perhaps, it’s just that Glencore has taken a long view of the iron ore market believing that by 2019 the fundamentals for the mineral are much improved.
The iron ore market is becoming enormously challenging at the current time with a surplus emerging in 2014 on the back of 142 million tonnes (mt) of new supply against only 55mt of incremental demand. The impact of this equation is a drop in the price of iron ore to $79 per tonne from $130/t last year.
According to BHP Billiton in a recent presentation to analysts, Chinese steel growth is slowing to 2% to 3% while previous supply constraints have eased as infrastructure development has improved.
Glencore would also know, however, that China’s steel production will peak in the 2020s at between one billion to 1.1 billion tonnes.
“Realising this incremental demand will be on the key drivers of the market,’ said Standard Bank in a recent report.
One final thought is regarding Glasenberg himself. Why the misdirection on the group’s interest in iron ore and might one be warranted to be careful of future strategic pronouncements?
Or to quote Manchester United’s former manager, Sir Alex Ferguson about Italian football: “When an Italian says it’s pasta I check under the sauce to make sure. They are innovators of the smokescreen.”
