The problem with being Glencore

Never afraid to back his own judgement, or take risks leaders of other mining companies might avoid, Glasenberg looks like a man who needs to make changes to the way he operates. One of the problems faced by Glencore is that it has the appearance of a swashbuckling mining company from another era, a time when what was said and done in places like Africa, stayed in Africa. Another problem, and one explored here in the past, is the theory that more financial value can be created by acquiring second-tier assets at a cheap price rather than buying or building the sort of tier-one assets preferred by mining rivals such as BHP, Rio Tinto and Anglo American. A third potential problem is once faced by all commodity traders and that's the need to ensure strong connections with the banks, which fund a lot of the dealing that is the lifeblood of a trader. Before looking at the questions confronting Glasenberg, it's worth considering the view of investors as shown in their treatment of the big miners over the past six months, a time which coincides roughly with the China-US trade war - an event with potentially significant consequences for commodity prices. Confidence, as every investor knows, is a fragile commodity Since the financial world was thrown into a spin by US president, Donald Trump, declaring that "a trade war is easy to win" - it isn't - the share price of the world's biggest and best miner, BHP, has fallen by around 13.7%. BHP is down, but a lot less than its rivals, reflecting BHP's combination of deep exposure to bulk commodities and a portfolio comprising mines that are generally ‘best in class'. Quality really does rise to the top when pressure is applied. Anglo American, perhaps surprisingly, is the second best with a share price decline of 16.6%. Rio Tinto is down 20% while Glencore collects the wooden spoon with a share-price slide of 30.1%. Eyebrows are raised whenever a company's share price slides by the best part of a third in six months and even a modest bounce in Glencore's price late last week failed to restore much confidence despite a stout defence of the company's strategy by Glasenberg at the company's annual investor day. What Glasenberg had to say included the salient point that there is not a glut of commodities sloshing around the world and that the outlook is for higher, not lower, prices. Copper and zinc were singled out as the future stars because stockpiles of those metals were down to 12-days and seven days respectively, a significant ‘drying up' of the 17-day average for supplies of copper, and 13 days for zinc in the three years since 2015. The problem for Glencore is that while the outlook for basic raw materials is good, largely because there hasn't been a mine development boom as there was after the 2008 global financial crisis, it's the other questions that weigh on sentiment. Politics, which might be boiled down to the question of a company's licence to operate, is weighing heavily on Glencore because it has deliberately chosen to do business in countries such as Russia and the Democratic Republic of Congo despite repeated warnings that these are dangerous places for western companies that are subject to Western laws and the intrusive inquiries of Western-government corporate regulators. Of particular interest is Glencore's relationship with an Israeli businessman, Dan Gertler, who became close to Congo's Kabila family, and investments in two big Russian resource companies, the oil and gas producer Rosneft, and the aluminium producer, Rusal. Confidence, as every investor knows, is a fragile commodity and it's one that all traders require as the buy and sell commodities.Not only is there a banking relationship somewhere in the deal, there is also a need to be comfortable with the status of the counter-party. On the other side of the world to Glencore there is another commodity trader, Singapore-based Nobel Group, which is experiencing problems with banks, investors and corporate regulators. Nobel grew from similar root-stock as Glencore under the leadership of a similar hard-trading chief executive in Richard Elman. But after its halcyon years before the 2008 financial system meltdown, problems developed with counter parties and a disgruntled former employee who raised difficult questions about Nobel's accounting practices. Glencore is a long way from facing the sort of problems that have caused Nobel so much pain but it does face the challenge of managing multiple inquiries into its Congo and Russian exposure, and pressure from environmentalists who are critical of company's coal mining business. Perhaps the biggest and yet unmeasurable test is the stress of continuing to run a very big mining company while also finding the time to juggle the balls that are in the air, hoping that one doesn't slip, or that another is tossed into the mix.

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