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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Elroy Jetson who wrote (113339)	9/10/2015 9:11:26 AM
From: elmatador	Respond to of 218598

Glencore has a mogul in denial John Gapper Glasenberg is having to retrench at the time when he should be able to snap up mining bargains Ivan Glasenberg, co-founder and chief executive of Glencore, delights in telling his rivals in the commodities industry that they are wrong, and in trying to prove it by running his business differently. So it takes quite an upheaval to persuade Mr Glasenberg that he, and not someone else, is mistaken. He tacitly admitted it this week by reversing course as his share price fell, Standard & Poor’s warned about Glencore’s debt rating and hedge funds ganged up. Instead of defying others as usual, he did what he had been told by implementing a plan to cut $10bn in debt and shore up Glencore’s balance sheet. I wonder, though, whether the message has entirely sunk in. Someone who starts a stock exchange statement with the word “notwithstanding”, and lists all the reasons why everything is fine before announcing a change of tack, has not yet reached “acceptance” in Elisabeth Kübler-Ross’s psychological model of the five stages of grief following loss. Mr Glasenberg is still flirting with “denial”. In one sense, he has surrendered and had no alternative. The slowdown in China, the plunge in the price of copper and industrial metals, and the chatter that Glencore would be in serious financial straits if the copper price kept on falling shocked him into action. Losing a paper fortune — his 8 per cent stake in Glencore is down to a mere £1.5bn — grabs one’s attention. But the market, it seems to me, is signalling more to Mr Glasenberg than discomfort at Glencore’s $30bn of net debt (compared with a market capitalisation that has dropped to £19bn this week from £37bn at its London initial public offering in 2011). It is conveying a lack of conviction about Glencore itself. Glencore has been an industry outlier since its post-IPO acquisition of Xstrata in 2012: a trading outfit integrated with a mining company that digs things out of the ground. While traders such as Trafigura (also descended from the late Marc Rich’s commodities trading business) mostly do one thing, and miners such as BHP Billiton and Rio Tinto mostly do another, Glencore does both. This is reminiscent of banking. Investment and retail banks used to be different businesses, run by different kinds of people, with different attitudes to risk and capital. In the 2000s boom the two sides converged, often to be run by risk-hungry traders and investment bankers rather than sober retail bankers. In the 2008 crash, the flaws in this innovation became obvious. Mining companies are not banks — Glencore’s debt leverage is far lower than any bank’s and linking a copper trader to a copper mine is less of a stretch than putting credit cards and credit derivatives under one roof. But Glencore’s travails show the tensions, especially in a downturn, in the model that Mr Glasenberg pioneered. The first tension is financial. Trading is a volume business with thin margins, in which leverage creates a high return on equity. The risk is limited by finance not being tied up for long — it is repaid when copper or oil is delivered — so traders use bank and short-term debt and do not need high ratings. Mining, in contrast, is a long-term, capital-intensive, cyclical business in which a good credit rating is essential. That protects a company such as BHP Billiton or Rio Tinto from a liquidity crisis when prices fall and many of its assets are still buried in the ground. A mining company’s balance sheet is inherently inflexible. Holding a lot of capital curbs returns in boom times but it comes into its own in a downturn, when a mining company can acquire assets that are going cheap, as many mines are now. Having miscalculated what the market would tolerate, Mr Glasenberg is having to retrench at the time when Glencore should be able to snap up mining bargains. The second tension is managerial. Like different breeds of banker, commodities traders have contrasting skills and attitudes to the mining engineers who explore for reserves and run mines. The trader specialises in risk taking and financial creativity; the engineer in risk mitigation and discipline. Trading is the dominant culture at Glencore. Mr Glasenberg initially agreed that Mick Davis, Xstrata’s former chief executive, would have that job in the merged company — and then took the role himself. Glencore’s mines are run by engineers not trading whizz-kids — even its rivals say they are efficient — but its heart is in trading. This combination has never been tried, and the way you discover whether an innovative business model works is to put it under pressure, which is what Glencore is experiencing now. Its head office in Switzerland must be suffering quite a stress test, given that its former partners have lost hundreds of millions in net worth, and it has had to shut some mines temporarily. The rebound in its shares this week suggests that its shareholders are less worried about the finances since Mr Glasenberg altered course. Well, it is a start. He may have to change his mind about other things, too.