The ancient custom of xiangfeng sees a copper bird fixed above a house to discern which way the wind is blowing. Nailing a bird to the roof of the Swiss headquarters of trading and mining giant Glencore seems particularly appropriate right now, given that the company earns 41% of its EBITDA from the red metal. And the wind is certainly blowing a gale, if the company’s volatile share price is indicative.
A famously secretive firm which built its fortunes on the China-driven commodities super cycle, Glencore now finds itself in the glaring spotlight, publishing almost daily updates to convince investors it is not about to give the world its next ‘Lehman moment’.
A reputation forged on reading the commodity markets better than anyone else has been shattered by the failure to foresee the pricing impact of the downturn in China, which has previously accounted for more than half of global copper demand. CEO Ivan Glasenberg said as much in an interview in August. “None of us know what’s going on there. I’m yet to find the guy who can predict China correctly,” he told Bloomberg.
For the past two weeks Glencore’s oscillating stock price has also become a focal point for fears about the wider impact of the Chinese slowdown on global growth. Glencore’s shares had been on a downward slope all year, but they began a steeper plummet in mid-September and suffered a calamitous 30% collapse on September 28 after an Investec research note magnified concerns about its $50 billion debt pile.
The suggestion was that Glencore’s future earnings could be consumed entirely by debt servicing if weak commodity prices persist. By this point the company’s shares had lost 50% of their value in the space of eight trading sessions. Brokers in London responded by mocking up a wanted poster of Marc Elliott, the Investec analyst who had penned the report, although wags joshed that Glasenberg wouldn’t be able to pay the reward on Elliot’s head, given the shrinking value of his own stake (as of October 6, his 8.5% holding was worth $1.44 billion).
Yet having hit a low of 68.62p ($1.04), the shares suddenly bounced back. The following Monday (October 5) they surged 72% intraday in Hong Kong, prompting a company announcement that it knew of no discernible reason why.
Some put it down to wild rumours that Chinese banks might be the mystery buyers of the stock – to save themselves from the fallout of a chaotic unwinding in their rehypothecation trades (using collateral posted by clients to back their own trades, see WiC241).
Others pointed to an article in the Sunday Telegraph, a British newspaper, which had said that Glencore was willing to listen to offers for the entire company.
But a fuller reading of the piece suggests the opposite. “Management does not believe any buyer would be willing to pay fair value in the current market,” it concluded.
Only a month earlier, Glencore had hoped to quell fears about its balance sheet by raising $10.2 billion through a series of measures: suspending its 2015 final dividend and 2016 interim dividend ($2.4 billion); reducing working capital ($1.5 billion); cutting capex ($750 million) and reducing third party loans ($650 million).
It also completed a $2.5 billion fundraising a few weeks later (accounting for 9.99% of its outstanding share capital), announced asset sales of around $2 billion and said that it was seeking bids for a minority stake in its agri-business unit, valued at about $10.5 billion. Interested parties reportedly include Singapore’s GIC, Japanese trading company Mitsui, China’s largest agricultural trader COFCO, Canadian pension fund CPPIB and a state-owned Saudi Arabian company, possibly Saudi Agricultural Investment and Livestock Company.
Hong Kong Commercial Daily reports that Chinese firms may be interested in buying some of Glencore’s copper mines – noting that MMG, a base metals miner controlled by China Minmetals Corporation, bought its Peruvian copper mine Las Bambas for $6 billion last year.
On Monday Glasenberg stepped back into the fray, arguing that weak copper prices are at odds with limited inventories of the red metal, with stored supply now at multi-year lows. He also blamed hedge funds for exacerbating the sense of crisis by using copper as a proxy for their bearish viewpoints on China’s economy.
Data from the London Metal Exchange shows inventories falling 3.1% in two months, while analysts believe Chinese supplies may have fallen much further (by as much as 23% over the same period) to 420 million metric tonnes.
Glasenberg’s remarks earned a scathing response on social media, with many highlighting the irony of one speculator blaming another.
Another commentator in the Financial Times even likened his reaction to the Chinese government’s response to the country’s stock market meltdown over the summer: “Will he soon start demanding traders are bought in for questioning by Glencore security staff to make sure the markets start ‘working properly’ again?”
Investec also weighed in once more, saying that Glencore is continuing to “blame everybody else for its woes”. In fact, the commodity giant has sailed into some of the stormiest conditions in recent memory. “The ending of China’s industrialisation cycle has been particularly vicious as the slowdown in demand has been met with a wall of new supply from mines built largely on debt,” the bank concluded.
On Tuesday Glencore tried again to calm concerns about its financial condition by explaining that the impact of any ratings downgrade would be limited. Some newspapers have suggested it might find it difficult to fund its trading business should it lose its BBB/Baa2 investment grade status. The warning signals are flashing: both Moody’s and Standard & Poor’s have based their financial models on copper prices of $2.50 and $2.70 per pound respectively (copper is now trading around the $2.33 level).
Most analysts believe the agencies will give Glencore a grace period, helped by liquidity at hand including $3.06 billion in cash (as of the end of June) and $23.6 billion in inventories (of which $17.7 billion constitutes readily marketable securities).
Key will be what happens to copper prices. Earlier this week, Japan’s largest copper producer Pan Pacific forecast prices of $5,500 per metric tonne by the end of the year, up from $5,147 per metric tonne currently. But most onlookers admit the outlook is more uncertain (“I think it will be like Jennifer Lopez. You’ll know the bottom when you see it,” one quipped on social media last week).
In terms of demand, one of the unknowns is the impact of China’s electricity grid rollout. Beijing recently announced plans to spend $315 billion on power infrastructure over the next five years. But there have been suggestions that higher-cost copper could be replaced by cheaper aluminium in the new grid, even though it is not as effective as a conductor.
Another unknown is how much of the new copper capacity will be pulled from the market. On Monday Glasenberg called on other producers to follow Glencore’s lead in mothballing 400,000 tonnes of output at two African plants over the next 18 months. Analysts estimate that a further 100,000 tonnes of production has been taken out by rivals, while another 700,000 tonnes may be lost as Chilean mines come to the end of their useful lives. Higher cost miners in the US may go into slowdown mode too as they start suffering from the stronger dollar. On the flipside, other countries, such as Peru, have been making the most of their weaker currencies by ramping up production.
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