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Glencore's Position In The Commodities World – Seeking Alpha

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Glencore, the world’s leading commodities trading company that is also a major producer of a wide range of raw materials around the globe, traces its roots back to the company I worked for over a twenty year period starting in 1977.

I began my career at the tender age of 17 delivering telex messages to traders and logistical personnel at Philipp Brothers in New York City and rose through to ranks to run several businesses including precious metals, nickel, and sugar trading. Some twenty years before I arrived on the scene as a teenager, another young man worked for the company in the traffic department. Marc Rich spent more than a decade at the company before going off on his own to start the company that gave birth to Glencore. While Rich was a fugitive from justice in the United States who traded with the Iranians in the oil market during the hostage crisis in the 1980s, he was a transformative figure in the world’s raw material markets. Today, the largest commodities trading firm in the world is Glencore, a company that Rich founded in Switzerland. Ivan Glasenberg, a South African trader, ran the coal business under Marc Rich’s wing for many years and today he runs Glencore.

Glencore experienced a massive growth spurt during the bull market in commodities that came to an end in 2011-2012. Thinking he was buying a dip in the raw materials market, Glasenberg bought a large producer, Xstrata in 2013, which buried the company under a mountain of debt that almost killed one of the most renowned firms in the world.

Glencore cleaned up its act in 2016

As commodities prices fell to lows in late 2015 and early 2016, it became a challenge for Glencore to meet its massive debt obligations and rumors started to swirl that the company could face bankruptcy. The weak financial condition of the commodities merchant and producer was not only a problem for Glencore but for many of the banks that had provided financing for the company. Glencore led by Glasenberg sprang into action, cutting staff and selling non-essential assets to pay down debt. Glencore sold their interest in the Las Bambas copper mining project in Peru to the Chinese and parted with a minority share of their agricultural business selling two tranches totaling 49% to two Canadian pension funds. Glencore stock had declined to a low of $1.95 per share in January 2016 when the company was on the edge of a financial cliff but the actions taken by management worked, the debt load subsided, and debt servicing payments and investor confidence got back on track in the months that followed. Source: Barchart

As the long-term chart highlights, shares in GLNCY rose from $1.95 per share to highs of $8.62 in February 2017. The rebound in raw material prices helped the shares move to the upside as earnings from production and trading grew, but it was the debt reduction and house cleaning by management that saved the company and put it in a position to thrive in the future.

A dominant force in the raw material markets in trading and production

Marc Rich had a long and often questionable history in the international oil trading market. While President Clinton pardoned Rich for his crimes at the end of his term, the pardon of Rich and his involvement with Iran in the late 1970s remains a topic that stirs many emotions. However, Marc Rich and Company the predecessor firm to Glencore has been a dominant force in the raw material markets in trading and production for decades. While Rich was one of the most notorious global traders for decades before his death in June 2013 with a net worth in the billions, it has been Ivan Glasenberg that took the company to the next level by investing in significant production assets around the globe.

A deal with Russia and Qatar boosts a powerful trader

As the successor to Rich, Ivan Glasenberg raised the profile of Glencore in the international petroleum trading business. In 2012, the company signed a five-year sales deal with Rosneft, the Kremlin-run oil producer. In 2016, the Russians positioned as a mediator when it came to OPEC strategy that led to the production cut by the cartel late in the year. After meetings in Doha and Algeria last year, the Russians succeeded in helping OPEC abandon their policy of flooding the market with crude oil and agreeing on the first output cut in nine years. The deal was no easy feat for the Russians who needed to stand between Iran and Saudi Arabia, the two powerful OPEC producing nations that are arch enemies.

In the wake of the OPEC deal, Rosneft sold a 19.5% stake in the Russian oil company to the Qatari sovereign wealth fund and Glencore. The Russians got a cash infusion of billions, Qatar increased its oil production and position in the petroleum market, and Glencore received marketing rights for at least 220,000 barrels of Rosneft oil each day. The deal for Glencore was a home run as the company only put up around 300 million euros for an equity stake and the flow of oil which bolstered their trading book. Additionally, the deal cemented relations for Glencore with both Russia and Qatar. In the aftermath of the deal, Russian leader Vladimir Putin awarded Ivan Glasenberg the coveted “Order of Friendship.”

While Qatar has found itself in a difficult situation over the past week since Saudi Arabia and many of their allies in the region severed diplomatic relations with the country, Glencore’s position in the international oil market has benefited from the deal over the past year. The deal in late 2016 caused Glencore to “move from a position of weakness to strength this year,” according to Chris LaFemina, an analyst at Jefferies PLC.

A deal in agriculture will increase influence

Meanwhile, one of the moves to bolster their balance sheet was the sale of a minority stake in Glencore’s agricultural business to the Canadian pension funds over recent months. The deal valued the entire business at over $6 billion. Glencore holds a 50.1% share of the agribusiness. One of the losing bidders for the business ultimately awarded to the Canadians was the Saudi sovereign wealth fund that is seeking to diversify the nation’s risk away from the petroleum business into other sectors around the globe.

A few weeks ago, Glencore announced their intention to purchase Bunge Ltd. (NYSE:BG), a global agribusiness with a market cap of around $11 billion. BG shares exploded higher on the news. The company has significant assets in the United States and Brazil where operates through five segments; agribusiness, edible oils, sugar and bioenergy, milling, and fertilizers. If Glencore succeeds in taking over BG, the company will emerge as a powerhouse in the world agricultural business.

Lots of upside for Glencore shares

Glencore is a commodities trading merchant company as well as a producer of a myriad of raw material products. While the shares will move in concert with commodities prices, the company has set cemented its position as a world leader in the global commodities business. Aside from their interests in energy and agriculture, Glencore is a major world producer of copper as well as other metals and minerals. They are also a leader in the international coal business and many other commodities when it comes to trading and production. This week, the company is attempting to cement their dominant position in the global coal business with another multibillion dollar investment.

Glencore shares closed on Wednesday, June 14 at the $7.235 per share level, up 271% from the January 2016 lows after trading to a high of $8.62 earlier this year. The all-time high for the stock was back in February 2012 at $15.70 per share, and the company’s profile in the raw materials sector has increased since then. The ship is back on course at Glencore. If commodities prices experience a recovery in the coming months and years, the shares are likely to rise to new all-time highs as Glencore is the cream of the crop in the world of not only the commodities trading and merchant business but when it comes to their production capabilities and investments in output around the globe. Growing global population means that demand for raw materials will only increase in the years ahead and Glencore is perfectly positioned to supply the world with the staples that people depend on each day. Moreover, given the Saudi interest in the agribusiness, it is possible that Ivan Glasenberg, who is a consummate deal maker, could be creating a segment that is very attractive for the Saudi sovereign wealth fund after they receive a massive cash injection from the upcoming IPO of Aramco in 2018. Glasenberg is a trader and traders always think about the exit plan when they enter into any transaction.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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