Secretive commodity trader strikes gold

ANALYSIS:Glencore is one of the world's top commodity traders – but rarely far from controversy

YESTERDAYS INITIAL public offering of commodity trading giant Glencore was the largest to date on the London Stock Exchange and the third largest in Europe.

Dubbed by Reuters as the “biggest company you never heard of”, the secretive Swiss firm is now valued at about €42 billion and has become the first company in 25 years to waltz into the FTSE 100 on its first day of trading.

Founded 37 years ago by controversial wheeler-dealer Marc Rich – who fled from the US prior to being indicted on charges of illegal oil dealing in 1983 only to be controversially pardoned on President Bill Clinton’s last day in office in 2001 – Glencore is immensely powerful.

It controls 60 per cent of the global zinc trade, 50 per cent of the copper market, 45 per cent of lead, 28 per cent of coal, and 10 per cent of the global wheat market.

It owns 34.5 per cent of FTSE 100 miner Xstrata, employs over 54,000 people globally and had turnover of $145 billion (€101 billion) in 2010.

Listing on the stock exchange has made millionaires out of almost all the firm’s 485 shareholders, while five executives are now paper billionaires. Chief executive Ivan Glasenberg, with a fortune of roughly €6.5 billion, is one of Europe’s richest men.

A physical commodity trader, Glencore locates customers for raw materials and sells at a profit. Its knowledge of the minutiae of the commodities world, helped by 2,700 well-connected staff in 40 different countries, is legendary. It has also bought miners and refineries in recent years.

That Glencore is choosing to give up at least some of its prized privacy at a time of soaring commodity prices (notwithstanding the recent correction) has led many analysts to suspect that it may be looking to cash in.

Just as private equity giant Blackstone Group went public in 2007 as the debt bubble peaked, Glencore’s move may be an indicator of commodity euphoria, they warn.

Glasenberg, who joined the company in 1983, dismisses this idea. Top management have committed to lock in their shares for the next five years, he noted.

Asked recently as to why the firm did not push for a steeper valuation – the 530p a share initial public offering is at the mid-point of expectations, despite enormous demand – Glasenberg protested that he wanted investors to “have some upside” instead of selling up to “go live on the beach”.

Going public has many attractions for Glencore. Rated Baa2 (negative) by Moody’s, an improved balance sheet will mollify rating agencies and foster large acquisitions.

It recently announced a $3.2 billion deal to buy Kazakhstan mining giant Kazzinc and its new “firepower” will enable bigger acquisitions still, Glasenberg said. A merger with Xstrata is on the cards, creating a trading and mining behemoth.

Paying off departing shareholders, too, is simplified by the funding a public listing offers.

Still, the transition to a transparent public company poses challenges. Greenpeace dubbed the firm “quite literally impenetrable, and not just because of the coal dust rising from its mines in Colombia” in 2008. Connections with Russian oligarchs and extensive business dealings in Kazakhstan, Democratic Republic of the Congo and Nigeria have raised eyebrows.

The IPO prospectus lists exposure to fraud or bribery as a risk factor and also refers to a criminal probe of a Belgian subsidiary charged with “corruption of an international civil servant and criminal conspiracy”.

Older allegations – illegal surcharges reportedly paid on oil-for-food deals in Iraq, alleged kickbacks paid to Venezuelan oil monopoly Petróleos de Venezuela in 2003, allegedly inflating shipping costs by doctoring documents in Nigeria in 2004 – have sullied the Glencore name.

Glencore argues that it is detailed in its legal compliance checks and that accounting firm Deloitte and the UK Listing Authority are satisfied with their procedures. PR firm Finsbury has been advising it, while it has spent $20-25 million in legal and accountancy fees in the lead up to the flotation.

Its prospectus, at more than 1,600 pages, is a gargantuan affair. Despite that, the detail provided on its trading operations “left much to be desired”, a Morningstar analyst complained this week, saying that it was not clear how much money Glencore was making from ordinary arbitrage activities as opposed to “speculative directional bets”.

Nevertheless, investor appetite for Glencore has been insatiable, with almost $50 billion of demand for just $11 billion of shares. So-called cornerstone investors, like sovereign wealth funds from Abu Dhabi and Singapore as well as Blackrock, the world’s largest money-management firm, have backed the offering by signing up for 31 per cent of the shares on offer.

They’re attracted by the profits – $4.4 billion last year alone. Approximately $2.4 billion of that figure came from trading, with the remainder coming from mining and industrial activities, although analysts expect the mining operations to increase in importance in the immediate future.

Buying into Glencore is a bet on commodities but also on its traders and their apparent informational edge. A workaholic culture prevails at the company, which looks for young and hungry staff eager to stay with Glencore for the long-term. Trader bonuses tend to dwarf even those doled out on Wall Street.

Early “grey market” trading yesterday saw slight gains for the shares, although official trading open to the public will begin on Tuesday.

Whether long-term gains are delivered depends not just on the future health of commodity markets but on whether the company can make the transition from one that operates in the shadows to one that can thrive in the spotlight of life as a public company.

Getting rich: Wheeler-dealer founder courted oil barons

THE STORY of Marc Rich, Glencore’s freewheeling founder, reads like something out of a John le Carré novel.

Born to a Jewish family in 1934, his family immigrated to the US in 1941 to escape the Nazis.

The young Rich eventually became a commodity trader with metals dealer Phillip Brothers.

Savvy, well-connected and ruthless, he hit the jackpot during the 1973 Arab oil embargo, buying up oil from his contacts in the region and selling it back to desperate Western countries as prices soared.

A year later, he left the firm to set up Glencore.

A lengthy investigative piece by BusinessWeek in 2005 charged that the art of the Rich deal was to “do whatever it takes”.

This allegedly included flying in oil barons to a villa in the south of France stocked with prostitutes, where they would be entertained for the week.

According to Swiss journalist Daniel Ammann, who interviewed Rich for his 2009 book The King of Oil, the Glencore founder admitted to supplying oil in apartheid-era South Africa, bribing officials in Third World countries and working for Israel’s intelligence agency, Mossad.

Rich was also happy to do business with Ayatollah Khomeini, despite the embargo that followed Iran’s taking hostage 53 Americans in 1979. US prosecutors indicted him on charges of tax evasion and illegal oil dealing with Iran in 1983. In Switzerland at the time, he didn’t return.

Despite his fugitive status, he continued to run Glencore from Switzerland over the next decade. He was eventually undone not by the law, but by a bad zinc trade that brought the firm close to collapse.

Management bought him out for an eventual fee of $600 million (€419 million).

Today, Glencore is valued at 100 times that figure.

Rich, despite being pardoned by president Clinton in 2001, remains an embarrassment to the firm, which does not even mention his name on its website.

Despite the changed times, Daniel Ammann says that one must understand Rich to understand Glencore.

“Rich was the mentor of Glencore’s top management,” he writes. “Willy Strothotte (chairman) and Ivan Glasenberg (chief executive) learned almost everything from him.”