Glencore trades at the top of the market

The timing of Glencore's IPO could signal the peak of the commodity cycle.
Glencore chief executive Ivan Glasenberg
Glencore chief executive Ivan Glasenberg

When a normally publicity-shy company comes out of the shadows, observers are right to be a little wary. Particularly if that firm has a murky past and is the leading player in markets that have recently enjoyed a spectacular bull run.

Last week, Glencore announced plans to raise $12 billion in a global initial public offering. With a 20% stake on sale, the deal would value the Zug-based commodities trader at around $60 billion. The company has grown rapidly since management bought out controversial former tax-fugitive Marc Rich for $600 million in 1994. It now dominates trading in base metals, is prominent in soft commodities such as wheat, and is directly involved in mining, logistics and agriculture.

Analysts say Glencore will use its war chest to make acquisitions, with Xstrata, the London-listed miner in which Glencore already has a 34% holding, tipped as the most likely first target. No doubt, it will time its purchases with the same skill as it takes its trading positions.

Some commodity investors fear that Glencore is using its industry knowledge to time the deal at the top of the market. Plans for the IPO have apparently been on the drawing board for the past five years, yet the company has chosen to launch the deal just as the conditions are forming for a downward shift in the commodity cycle.

First, the cheap liquidity that has sustained speculative commodity buying looks likely to dry up soon. The US Federal Reserve’s second round of quantitative easing will end in June and few expect it to be renewed a third time. The Fed has been the main buyer of US Treasury bonds, depressing short-term interest rates and yields on longer-dated bonds. Riskier assets such as equities and emerging-market debt, as well as commodity prices, have surged during the past two years as a result — and low interest rates have also encouraged miners and farmers to make bigger investments, which should lead to a greater supply of key commodities.

Higher real interest rates increase the cost of carry for storable commodities, and encourage speculators to switch into less risky assets such as treasury bills. In the past decade, commodity price growth has had its best 10-year rolling return for 200 years, so it makes sense to take profits, especially as equity markets have already started to fall.

Second, China’s seemingly inexorable demand for those commodities might falter as the authorities tackle the rapid rise in inflation with a range of tightening measures. China is the world’s biggest buyer of industrial metals, driving global demand since 2003, as Rio Tinto’s chief executive Tom Albanese pointed out at a conference in Hong Kong last month. But imports of copper, for example, fell to a two-year low in February as the Chinese central bank has raised interest rates three times since October 2010. The copper price has reacted and dropped in recent weeks.

The country’s GDP growth this year is still expected to exceed 9%, but consumer prices jumped 5.4% year-on-year in March, the biggest rise since July 2008. Other countries in Asia, notably India, are suffering from similar inflationary pressures due to the rise in commodity prices last year and are raising interest rates and tightening fiscal policies. Prices are also rising in Europe, where the headline inflation rate was revised up to a two-year high in March.

The demand for commodities from emerging countries, especially China, to feed, fuel and build their economies no doubt represents a structural shift, but cyclical waves can easily interrupt a linear trend — as happened in the second half of 2008.

Indeed, Goldman Sachs, with a commodity trading expertise that rivals Glencore, advised investors last week to take profits from several commodities, including copper, cotton, crude oil, platinum and soybeans, reversing its buy recommendation from late 2010.

Interestingly, Goldman Sachs is one of the few big investment banks not involved in Glencore’s IPO. But, no sour grapes, surely.

It remains confident about commodities in the long term, but says short-term price pressures are stacking up. The secular trend may well remain intact, but as Glencore knows, timing is everything.

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