Glencore PLC (GLNCY, Financial) is one of the world's most recognizable names in the commodities market. That Glencore has come under increasing pressure recently is testament to overwhelming stress factors placed on commodities like copper, iron ore, silver, platinum and crude oil.
These factors include weak demand emanating from China, U.S. dollar strength, an oversupply of minerals, precious metals and energy commodities, and the looming threat of rate hikes by the Bank of England, the Fed and other authorities.
What we are seeing now is a run on commodities by speculators. Major commodity companies like Glencore have come under increasing pressure due to global pressures. As a case in point, Glencore's share price has plunged by approximately 67% in 2015. The company's CEO has announced drastic measures to turn things around including the following:
- Challenging rival companies to close unprofitable mining operations
- The shuttering of two copper mines in Zambia and the Democratic Republic of Congo, divesting from agricultural assets in order to eliminate a large percentage of debt
- A multipronged approach to engaging shareholders and stakeholders about the company's future
Note: The two copper mines in Africa (Zambia and the DRC) are responsible for a total of 2% of global production.
Banc De Binary analysts indicate that these actions are likely to have a knock-on effect with rival mining companies, which will lead to a sharp decline in inventory levels in the short to medium term, and ultimately to upwards pressure in commodities prices. When that meets with increasing demand from China (the world's second-largest economy), the other operations of companies like Glencore will become far more lucrative. That is when we will see strong bullish sentiment on the LSE, Hang Seng and elsewhere.
Glencore is on the right track for the long term
Glencore is an important player on the FTSE 100, albeit the worst performer of the year. The price of Glencore rose 21% on Monday, Oct. 5 to close at £1.15 for the day. Much the same is true for the company's Hong Kong share price, which closed approximately 18% higher for the day on the back of news that major companies were looking at owning minority stakes in Glencore. It should be kept in mind that whatever happened in Hong Kong is of little consequence for the company’s stock, because Glencore has a minor weighting in that market. In fact, the sharp appreciation in the company’s share price forced management to issue a statement to the effect that no buyout deal was imminent. There has also been talk circulating about Glencore privatizing if investor sentiment continues to be bearish. Overall, the CEO is convinced that what we are seeing now is nothing more than a speculative tsunami, which is pressuring commodity prices across the board. Weak demand from China, coupled with declining PMI in services and manufacturing has not helped boost sentiment.
At the end of September, Glencore witnessed sharp selloffs of its stock, leading to massive declines on the FTSE 100 and the LSE overall. Rival mining companies have not fared any better, with Rio Tinto, BHP Billiton and Anglo American all suffering consistent losses on the LSE. However, Glencore alluded to maintaining just three weeks worth of copper inventories in its facilities, thereby boosting the futures market for this metal. With demand for copper in China increasing, inventories declining, and the shuttering of less profitable copper mines, there is a pervasive opinion that Glencore is on the right track. There is no doubt that the company's shares were oversold in the last week of September.
Glencore is not Lehman Brothers
Glencore shares have recovered well after the sharp selloffs, but volatility remains. If one considers that the stock was floated at a price of £5.30 back in 2011, the stock price is but a shadow of its former self. Surprisingly, the company made comments to the effect that there was no reason for the sharp appreciation in the share price of late. Additionally, there is no talk of a management buyout, or of the company being approached by other companies for a percentage stake in Glencore.
Of all the mined commodities that the company is involved in, copper is the most important. The fluctuating price of this metal has resulted in plunging profits across the board, as mines throughout Africa are facing revenue declines, falling returns on equity and layoffs. One of the biggest problems facing Glencore is its overall debt. To this effect, it is engaged in a $10 billion debt reduction plan. The total debt of the company is estimated at $30 billion, but Glencore has significant asset holdings that it can liquidate to satisfy shareholders and creditors. Several financial entities have expressed an interest in the company including the Canadian Pension Plan Investment Board and Mitsui from Japan.
Stay public or go private?
The CEO has been quick to reassure investors that reductions in mining activity (unprofitable activities) must take place ASAP. About 33% of all company earnings come from copper mining, and with prices as low as they are, the Glencore's bottom line is hurting. Inventory destocking is taking place at a furious rate, and industrial metals supplies are at an all-time low. Demand from China is increasing, despite the structural weaknesses plaguing the Chinese equities markets. Speculators are milking market anxiety for all that they can, shorting Glencore stocks and other mining companies. Capital expenditure on copper mines will likely start flowing when the price of the metal increases. One of the reasons why Glencore is unwilling to go private is because shareholders would want significant payouts when they leave. With public companies, the sale of shares is facilitated by other traders who buy those shares. That is the extent of an individual's ties with a public company. With a private company, however, substantial liquidation of assets must take place in order to pay out shareholders.
