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Resource trading: Glencore stock shock stokes debate on tighter regulations
TOKYO — Fears over the finances of Glencore, the world’s largest commodities trader, are spurring talk of regulatory tightening in the U.S. and Europe.
The Switzerland-based company handles resources such as nonferrous metals, crude oil and grain. It accounts for 3% of the global crude oil trade. In late September, Glencore’s share price plummeted 30% in a single day. The stock has since rebounded, but investors remain anxious about the company’s financial health.
Glencore traces its roots to a resource business established in the 1970s by legendary oil trader Marc Rich. The company grew quickly, in part, because Rich was willing to gamble on politically risky endeavors. During the Cold War era, Glencore raked in huge profits by deepening ties with South Africa — then under U.S. sanctions — and procuring commodities at low prices.
Rich was indicted by the U.S. government for illegally trading with Iran in the 1980s, among other alleged infractions. He was later pardoned, controversially, by U.S. President Bill Clinton.
Today’s Glencore was established in 1994 by current CEO Ivan Glasenberg and other executives who bought shares from Rich. Glasenberg’s expansion strategies are seen as one cause of the plunge in the company’s stock price.
Murky business
Glasenberg led a binge of acquisitions of nonferrous metal and coal mines, as well as oil concessions. He sought to build up Glencore’s presence in not only downstream trading but also upstream development and production. In 2013, Glencore bought Anglo-Swiss mining company Xstrata, underscoring its status as one of the world’s resource giants.
This appeared to be a sound approach when resource prices were soaring. The upstream operations became a major source of profit for Glencore, and after the company went public in 2011, its stock price rose steadily. But things changed when China’s slowing economy pushed the international prices of copper, coal and other commodities off a cliff.
With Glencore’s upstream profits declining, net interest-bearing debt of $30 billion fueled market concerns about its finances. The company is seeking to assuage those worries by selling assets and curbing investment. It hopes to avoid a credit rating downgrade to noninvestment status, which would increase the cost of procuring funds.
But the market is also uneasy because of Glencore’s opaque management style — not uncommon in the resource trading field.
Since Rich’s heyday, resource traders have been generally reluctant to disclose information. Many trading houses prefer to remain unlisted. Switzerland, with its fairly loose disclosure rules, makes an appealing base.
Despite being a listed company, Glencore’s trading segment keeps its cards close to its vest. The company carried an inventory worth $18 billion as of the end of June, but the breakdown of products was unknown. Some investors are worried that Glencore will eventually unload inventory at a loss to reduce its liabilities.
Your move, authorities
All of this is stirring broader concerns about resource traders. Critics argue that without stronger regulation, a crisis in the sector could shake the overall financial system.
The collapse of U.S. investment bank Lehman Brothers led to stricter rules on financial institutions. Might Glencore’s stock plunge have the same impact on trading houses?
In response to calls for a clampdown, Western authorities are thinking about limiting the holdings of trading houses in the futures market.
Companies in “the cash market may be obliged to report their asset holdings and other information to authorities,” said Naohiro Niimura of Tokyo-based research and consulting company Market Risk Advisory.
On the other hand, some industry watchers warn that tighter regulations will hurt the liquidity of the commodity market and exacerbate price volatility. Either way, regulators are playing catch-up in responding to the growing presence of resource traders in the market.
Resource trading: Glencore stock shock stokes debate on tighter regulations
