Glencore IPO raises temperatures

[] — THERE ISN’T disquiet yet among officials at Anglo American regarding the proposed listing of Glencore, the commodities trader. In fact, it’s something of an old chestnut now: the speculation that once listed Glencore would merge with Xstrata creating an entity with enough firepower to launch a more compelling bid for Anglo than that mounted by Xstrata in its failed 2008 “merger of equals’.

South African born Glencore CEO, Ivan Glasenberg, told the Financial Times this week that a merger with Xstrata, in which Glencore has a 34% stake, might make sense provided valuations could be agreed – currently a sticking point, he added. The matter hasn’t been discussed at Anglo.

So much for Anglo’s future. But what of the possible merger of Glencore and Xstrata? While the co-existence of the Glencore/Xstrata cross-holding might be anathema on the FTSE 100 Index these days, removing it through a merger would create a very different animal compared to mean among the peer group – BHP Billiton, Rio Tinto, Vale and Anglo.

Cynics may argue that the merger of Glencore and Xstrata would be an effective means of burying again Glencore’s secretive commodities trading activities about which there is some wariness ahead of the IPO, estimated to attract a $60bn value. At the same time, such a strong presence in the trading market as Glencore would now become a fully integrated player allowing it to more heavily influence the market.

Glencore’s trading business is significant. For the first time, the Swiss based company disclosed, in a regulatory filing to the London Stock Exchange this week, that it was the world’s largest physical supplier of third party sourced commodities in the majority of metals and minerals markets. Third party supplies are those that stand outside of formal contracts; in other words, metals and minerals that can be freely traded. This includes 45% of the third party lead market, 38% in alumina, and between 30% and 20% for aluminium, cobalt and thermal coal.

Glencore also has significant heft in actual metal production akin to the world’s top mining companies. Copper production from Africa, for instance, will jump to 370,000 tonnes/year.

Some analysts feel, however, that the trading element of Glencore can’t remain feasibly in the public eye. In a report issued on April 15, London broker Fairfax drew parallels between Glencore’s proposed IPO and MG Metals which was the last of the major metals trading firms to have floated its business in London. While MG Metals was keen to improve its market presence, it was less enthusiastic to reveal its profit margins. As a result, MG Metals sold itself within two years of listing.

Says Fairfax: “We expect Glencore to follow a similar pattern. The trading business is not going to want to reveal too many secrets. Its dominance, revealed today, in trading some key commodities, may spark regulatory inspection and may work against Glencore’s traders in certain ways. There will always be those who look to break down this sort of near monopoly.’

The pressure Glencore’s trading business faces when it has to regularly update its profits and margins, is that its metal suppliers will look for improved prices. At the moment, keeping schtum about the difference in metal cost and selling price to end-user enables Glencore to remain highly profitable and, dare one say, influence if not manipulate the market. So great is the risk to its trading business, that Fairfax believes Glencore could take it private again within a few short years.

Already there are signs Glencore is struggling to come to grips with the public life. The Telegraph in London made much of Glencore’s tardiness to appoint a board and a chairman. In fact, news of the IPO was released before it had appointed a chairman – Simon Murray formerly of Asian ports, telecommunications, and infrastructural giant, Hutchison Whampoa instead of the more heavily fancied Lord Browne, formerly of BP. While a chairman is a key appointment for most public companies, it’s only an after thought at Glencore because key decisions will continue to be taken by the few alpha males in the group. That’s the worry anyway.

In any event, the Glencore IPO certainly lifts the temperature in the commodities market, as if such a lift were needed. Is there, for instance, any mischief in the surprising volte face of Glencore rival, Goldman Sachs, which warned investors recently to back off commodity markets because prices were now threatening demand?

Goldman warned of too much speculative froth in the oil market and then struck a cautious note on copper which it closed its long position first recommended in October. Goldman also turned negative on platinum. “We still see significant upside in soya bean prices, but believe that copper and platinum will face near-term headwinds as higher oil prices potentially translate into a negative demand shock for the metals and has these commodities are exposed to supply chain problems resulting from the earthquake in Japan,’ Goldman said.