Depending on what side of the trade you were, many commodity investors want to put this month behind them.
The first week of May witnessed an 11 percent slide in Standard & Poor's GSCI Index of 24 commodities — the worst rout in almost two years.
Michael Coyne | Axiom Photographic Agency | Getty Images
The 19-commodity Reuters-Jefferies CRB index meanwhile tumbled about 9 percent since April 29.
U.S. crude futures slid about 15 percent, silver 28 percent , and both copper and gold about 5 percent since the start of May.
Given this type of market volatility, conventional wisdom would suggest this isn’t the best environment or time for a commodity company to raise capital through an initial public offering.
Glencore though doesn’t appear unduly concerned about the wild market moves.
The Switzerland-based commodity trader — which now boasts a logistics arm and a growing industrial minerals production division — plans to raise $11 billion through a dual-listing in London and Hong Kong, valuing the company at nearly $60 billion.
Chief Executive Ivan Glasenberg, brushed off the recent commodities slump, saying he remains bullish about the longer-term outlook and insists the floatation will go ahead as planned.
Glasenberg put the wild swings in May down to “speculators’ moves” and said underlying fundamentals remained strong.
Despite the bullish words but many observers are drawing a parallel between private equity giant Blackstone Group’s floatation in 2007, which marked the top of the debt bubble, and Glencore’s IPO — a move that some say may signal a top in the commodity market. Michael Langford, proprietary trader at StreamTrading.com, says that logic is deeply flawed.
“It is incredibly naive of people to say Glencore's doing an IPO because they're picking the top of the commodities cycle,” Langford said. “I think this is the whole point of trading which is a trade can go short or long. Glencore is not locked into only going long in the market. So if Glencore thought that the only reason they were going get out because they were picking the top of the commodities cycle, it makes absolutely no sense from a trading perspective.”
So, if Glencore isn’t picking a top in the commodities market, then what’s the driving force behind the IPO? Ivan Glasnberg explains, “We want to keep taking these opportunities of fixed assets which can be acquired,” he said. “It does not work anymore in a private company structure.”
Pre-IPO disclosures have lifted the veil on just how much of the global commodities trade Glencore controls.
Glencore told investors it controls more than half of the so-called third party market in zinc and copper. The company also disclosed that it controls 45 percent of the third-party lead market, 38 percent in alumina, and between 30 and 20 percent for aluminum, cobalt and thermal coal.
But an increasing shift towards higher-margin production side of the business will characterize the Glencore of the future. Glencore’s mines, smelters, and other industrial assets are set to surpass the company’s trading arm and drive profits for several years, according to banks underwriting the commodities trader’s flotation.
And experts say Glencore will use its added financial muscle from the IPO funds to continue bulking up its production division through the acquisition of more assets in Africa and central Asia.
“It will give them access to, on balance sheet, additional funding,” said Alan Winney, CEO of Queensland Sugar Limited. “I think it's all about really moving into an integrated supply chain.
They want to be able to access further down the chain, have production capacity in both mining and agricultural products and I think it'll allow them to strengthen their position.”
Industry watchers say the ultimate goal for Glencore is to amass the necessary firepower for a merger with Xstrata . Glencore already hold a 34.5 percent stake in the mining giant, and Glasenberg has gone on record saying it would make sense to combine with the FTSE 100 miner. A merger between Glencore and Xstrata would be the biggest ever mining takeover.
Sebastian Derungs | AFP | Getty Images
The headquarters of the Swiss commodities giant Glencore in Baar, Switzerland.
Despite the significance then of this IPO for the commodities industry and the broader market, why did Glencore on May 4 set a price range of 480 to 580 pence per share for the London IPO — a range many believed was conservative? Then in the unofficial gray market in London, the stock’s performance was arguably underwhelming, trading below the issue price of 530 pence, leading some to argue that the valuation was too rich. Clearly, there are challenges valuing a company with a unique business model and one that’s been out of the public eye for 37 years.
“I suppose when you look at demand, there is indications of very very strong demands so better to set lower expectations than higher expectations,” said Catherine Yeung,
Investment Director at Fidelity International. “We also have to put it into perspective with what's been going on in the market in terms of market sentiment. I mean the first quarter, the switch trade was happening. So there wasn't a lot of high conviction generally speaking from investors.”
The mid-point of the range for the London IPO values the company at around $61 billion.
Is the lackluster performance of the shares during conditional trading in the London market a shape of things to come? Jonathan Barratt, Managing Director of Commodity Broking Services, remains optimistic, “The size of Glencore also suggests to people that it is a must have portfolio and when you see the subscriptions for the IPO, it doubled what the market anticipated,” he said. “You get a sense that this is a blue, blue, blue chip stock that every fund manager must have a part of it and that in itself is creating that overbid for that particular stock.”
One thing is certain: Glencore’s IPO will shake up the landscape of the commodities industry, the floatation will consolidate its already strong pricing power while the competition regulators, industry peers and end-users alike will be paying close attention to this once secretive Swiss company’s growth strategy.