Glencore PLC is perhaps not the biggest trading company on earth. It is difficult to keep scores when permanent mergers and divestments change rankings year by year, but it is pretty much up there. It trades half of the world’s zinc, copper and lead and is the biggest exporter of thermal coal. It ships 10 per cent of all grain and covers three per cent of worldwide crude oil demand.
Size aside, it is certainly one of the most skilled and shrewd operators there ever were. “Glencore’s history reads like a spy novel,” an Australian broadcaster once remarked, without much exaggeration.
Founded in 1974 by Marc Rich, the father of oil trade, it was bought out in 1994 by its management after his attempts to corner the zinc market had incurred huge losses for the company.
Rich, accused of tax evasion and embargo busting on a grand scale, had to flee the US in haste to Baar, a sleepy hamlet in Switzerland, providing a tax refuge and legal shelter. Glencore still resides there today, even after Rich was so controversially pardoned by Bill Clinton on his last day in office.
During my years as a commodity trader in Russia I could witness Glencore’s operational style at close quarters. It is a company always sailing close to the wind, currying favour with politicians and executives without ever being found guilty of embargo busting or bribery.
It was accused of child labour, tax evasion, environmental damage and violence against indigenous peoples by governments and NGOs on many occasions. They always had to back down because of a lack of hard evidence. Fine-line-walking is part of the genetic makeup of the company: its managers are hard-working, brazen and risk-taking, yet they scrupulously calculate risk and reputational damage, always managing to stay distinctly on this side of the law.
When Glencore decided to go public in May 2011, I was confident that their shares would represent good value. There was a good chance, I thought, that with other investors underestimating the company’s potential, valuations of the Initial Public Offering on London’s Stock Exchange would be modest. After all, very little was known about these hitherto secretive traders, who used to keep their books under lock.
Glencore was catapulted into the front ranks of the FTSE 100 index at launch and Ivan Glasenberg, the company’s CEO and its largest shareholder, was made a multi-billionaire over night. In the first days of trading, Glencore’s stock moved sideways, hovering around 530. When it dropped to 471 a month later I decided to buy. It would prove to be a rollercoaster ride until I eventually sold all my shares six years later.
In May 2013 Glasenberg decided to take over Xstrata, a mining giant of copper, nickel, vanadium and zinc, the world’s largest exporter of thermal coal and the largest producer of ferrochrome.
Glencore was not only a 40 per cent shareholder of Xstrata but also its biggest distributor. With headquarters in Zug, a mere two miles away from Glasenberg’s office, it was not only physically close. I rejoiced: the idea to complement Glencore’s vast trading operations with similarly large mining facilities looked like a perfect hedge to me. When commodity prices would drop, trading margins should improve and vice versa, as higher financial costs of trading with thinning trading margins could be counterbalanced by higher mining profits, I was sure.
Glencore’s history reads like a spy novel
The markets did not agree. When in the aftermath of the financial crisis commodity prices nosedived, Glencore’s share price followed suit: in August 2011 shares dropped to 347.95, two years later to 256.85. My investment had almost halved in value. What should be done?
As most retail investors I was hesitant to cut my losses. After all, as long as I didn’t sell, the damage would not materialise. Paper losses do not look like “real” losses to us, so long as there is hope.
On the other hand, I well knew that no matter how big a future recovery, to make up for a 50 per cent loss, shares would have to rise more than 100 per cent – a very unlikely scenario under any circumstances. I therefore decided to reduce my purchase price by buying additional stock at lows. In 2015 I purchased at 133.80 to only see the stock further fall a month later to 95.
By all measures I seemed to have bet on a dying horse, with Glencore becoming not only my biggest single investment but also my most disastrous. In January 2016 the share price stood at 73.50. By then I had stopped buying. My now vastly larger investment had yet again halved in value, sending my initial paper losses into the stratosphere.
Glencore, burdened with $30 billion in debt, registered its first loss in the company’s history; and its largest investors, like Abu Dabi and Qatar, were getting increasingly impatient. A collapse did not look outlandish.
Glasenberg, a passionate marathon runner famed for his frugal lifestyle, started to feel the heat. He gathered his main shareholders (all smaller than himself) and outlined a strategy to speedily reduce debt. Within a few months, assets worth $10 billion were sold, mostly upstream oil operations. Many mines, contributing to the commodity glut in the first place, were mothballed to help the markets to recover.
Four months later the share price had recovered to 151.19 and then to 185.00 in August 2016 – my losses had evaporated. I held on until the summer of 2017. Selling all my Glencore holdings at 337.80 I had managed to make a 50 per cent gain on my overall investment.
At the time of writing, March 15, Glencore quotes at 385.80. I have missed out on further gains of £48 sterling per share.
Did I sell to early? Most likely. At a price earnings ratio of 13 and with a dividend yield of 3.73 per cent, shares still look like good value. Glencore has displaced Vitol, another behemoth trader, as the number one off-taker of crude and gas from Rosneft, Russia’s biggest oil producer, helping it to financially manage the sufferings of a punishing US-led embargo.
Glencore is now among the world’s most advanced traders in liquefied natural gas (it has more vessels than the Royal Navy) and has just signed a 50,000 tonne cobalt contract with China over the next three years – a third of the world’s current production. Each electrical car battery needs 10kg of cobalt. Without Glencore, with a 60 per cent share of globally produced raw cobalt, the advance of the electric car industry, and China’s ambitions to dominate it, would be curbed.
Yet I have no regrets. The stock market as well as commodity markets are cyclical. What goes up will come down. To time the right moment is well nigh impossible.
And I have been shaken badly by Glencore. Glasenberg’s acquisitive ambitions are too hardnosed and mindboggling for a timid retail investor like myself. Who knows what he’ll be up to next.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge. It should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.