Copper a cropper, oil in turmoil and cocoa gone loco….just another day at the office for the commodity traders of the world. The business of commodities is tough and volatile and subject to an array of internal and external factors – war, weather, politics, geography. Take for instance the Harmattan, a hazy desert wind that blows through West Africa in the dry season – depending on its strength, cocoa futures can rise by more than 50 per cent as a result. This highlights the unusual and mischievous character of commodities. They are a bizarre beast, each with their own personality.
Despite their unpredictability (or perhaps because of) we are sitting in a commodities super cycle that fuels the global economy. You don’t think so? Just look at the FTSE 100 and see how many commodity-based companies sit there – yep, quite a few – and these are the sorts of companies that pension funds invest in and indexes track. We’re all closely involved in commodities whether we know it or not and that is why so much attention is being paid to Glencore. Especially this week.
There aren’t many companies that have the financial markets and media drooling; however, Glencore, the Swiss commodities giant, is one of those rare exceptions. Much of its lustre seems to stem from its secretiveness and reputation as the “biggest company you never heard of.” Well, perhaps once…the luxury of secrecy went as soon as the market heard rumours of a float. Glencore has flirted (rather than floated) with the market for some time but it is finally expected to push the button this Thursday after the chief executive revealed to the FT that an IPO was “imminent.”
The future of Glencore has generated such interest because it signals much more than just the fate of a solitary company. It represents the convergence of wider factors – including the biggest IPO issue of the year and whether it might spark an industry trend. Also, given the firm’s reputation for sharp timing, some investors are concerned about future returns and wonder if Glencore is calling the top of the market – in other words, have we seen the best of the commodity bull-run?
Glencore is unlike many of its peers in terms of its breadth. It is a hybrid company made up of commodities trading, logistics, mining and agriculture. This spread means that it difficult to value and might also put off traditional mining investors. That said, the spectacular level of interest in the company and its stellar reputation in the market, suggest that take-up will not be much of an issue.
Looking beyond the IPO, life as a listed company will throw up some issues Glencore has never had to deal with before. It may sound trite but going public is well….extremely public, and this might not play well with its star personnel that could previously operate well out of the spotlight.
Key commodities are also often found in countries where democracy and the rule of law is an afterthought. For a business looking to secure investment from pension funds and other institutional investors, who have transparency and governance issues to consider, this might present a problem. Glencore will not just be able to breeze into the Democratic Republic of Congo and involve itself with copper mines without a second thought. Political risk will be a consideration for shareholders; that said, this is not exactly a new phenomenon and operating in ‘troublesome’ geographies is common for firms involved in natural resources. Rob Edwards, head of mining research at Renaissance Capital, recently said: "I wouldn’t feel uncomfortable with Glencore’s political risk profile….. The reality is that mining companies have to go to where the geology is. It’s just a fact of life."
Glencore has been phenomenally successful as a private company but life as public entity is very different. Senior management will need all their wits about them to continue to push forward and deliver value in a business as volatile as theirs. The oddities of commodities….