Not financial advice, full disclaimer available here.
Did you read the book?
Earlier this month, I recommended The World For Sale — a book by Javier Blas and Jack Farchy. It’s the best thing I have read about trading, finance and the global economy. The book is about the rise of commodity traders in the 2nd half of the twentieth century. The World For Sale is the inspiration behind today’s piece, which focuses on Glencore.
The company
Glencore is a contraction of the words global, energy, commodities and resources. The Swiss company is a commodity powerhouse that combines trading intelligence with a global mining empire.
The corporate dynasty that gave birth to Glencore was founded in 1974 and has been dominating the global commodity trading industry for decades. Glen is the world’s largest independent trader. It’s the top trader in metals, coal and wheat, as well as the 3rd biggest trader in oil. So their trades often set the price.
Over time, trading profits have been reinvested to build the company’s own supply chains, including mines, oil tankers, warehouses, flour mills and more. Glencore is not just a middleman anymore, but a provider of critical infrastructure for the flow of global trade, much of it in emerging markets.
GLEN has actually evolved into a blue chip stock in metals & mining (its primary business) with a market cap of $68bn, the 3rd largest in the industry.1 Today, the company is:
the world biggest exporter of thermal coal, used for power generation2
a leading copper miner, used for electric wires (mostly in building construction)
the largest miner of ferrochrome and zinc, key metals for the steel industry
the top producer of cobalt, crucial for batteries in phones and EVs
Glencore has achieved exceptional growth since inception in 1994. In the 1990s, it was averaging profits in the hundreds of millions per year; in the 2000s, profits grew into the billions; in 2022, Glen earned a record $17.3bn in net income.
Mining vs Trading
The mining business is more cyclical than the trading one. In a commodity bear market, lower prices result in lower profits from mining. Traders, however, can bet against commodity prices and keep making money. And falling prices mean less working capital requirements because the cost of each cargo of oil, metals or grain is lower.
The culture
While many of the characters featured in the book are no longer active, the story does give readers a sense of how Glencore approaches business.
Glencore is like a jungle. You’ve got to perform and you’ve got to perform highly, every day and every year, otherwise you are in trouble. It’s either perform or die.
Blas & Farchy, quoting Lucio Genovese who ran the Moscow office
This intensity explains why Ivan Glasenberg, the former CEO of Glencore (who ran marathons), did better than almost anyone else during the China-led commodity supercycle. Glencore is a place of hard work and high expectations. Traders must be smart, personable and aggressive in order to succeed. They are fierce negotiators with a singular focus on making money.
Gary Nagle, the current CEO, made his professional debut in the coal business, just like Glasenberg. He is South African with a training in accounting, just like Glasenberg. I doubt Gary goes bear-hunting with Russian aluminum tycoons like his predecessors, but I would not underestimate the man. Who bought BHP’s coal assets in Colombia at a time when ESG activists were (are) taking over the boards of western corporations? Gary Nagle.
Glencore is not exactly an ESG shark, they have a plan to responsibly wind down their coal operations. But they seem less fanatic about it than other companies. Glencore takes a more pragmatic view: they will keep producing and trading fossil fuels as long as the world needs them. They have a barbell portfolio with thermal coal on one side and copper on the other.
Similar to coal, doing business in tough places is part of Glencore’s DNA. Here is a list of countries Glen has traded with over the years: Chad, Congo, Iraq, Jamaica, Kurdistan, Nigeria, Romania, Russia, Tajikistan, Venezuela. It’s not always been a success; but the ability to go anywhere and deal with anyone is what made Glencore the natural resource giant that it is today.
The risks
The conclusion in The World For Sale has a bearish tone. Don’t take that lightly. The authors know more about commodity traders than anyone, except the actual traders.
Before we review the challenges facing trading houses, it’s worth repeating that Glencore derives most of its profits from mining and that 2022 was the best year the company ever had. Glen’s mining business generated $20bn in adjusted EBIT3, versus $6bn from trading (also a record).
Moving on to risks, the main ones are:
democratization of information
deglobalization
reputation
funding
competition
Information is a valuable resource. Easier and faster access to information makes it harder to profit from price dislocations around the world, no question about it. But how many market participants could have chartered the world’s largest oil tanker to store millions of unwanted barrels when the planet was on lockdown? Glencore’s network of contacts is still a competitive advantage.4
Trade wars are by definition anti-free trade. The liberalization of global trade has profited traders for decades; that trend has now gone into reverse. This was addressed during Glencore’s last earnings call. Because the world has become so interconnected, the path towards deglobalization is slow and messy. So Glen benefits from market inefficiencies in the interim.
Traders have become notorious for their willingness to bend the rules. They don’t look at countries like Russia and Congo as dictatorships and failed states. Instead, they see them as business partners. This makes traders easy targets for western politicians, who are more than happy to fine those “unethical actors” for dealing with their counterparts abroad (see footnotes).5
Credit is the lifeblood of commodity trading. It allows traders to handle huge volumes of raw materials without paying upfront every time. Without it, business stops. So, if banks cease to extend credit to traders in the name of climate change, or gender diversity, Glencore is in trouble. Lenders can also cut ties with traders if they are caught doing business in funny places.6
The success of commodity traders has motivated other firms to enter the marketplace. Stated-owned oil companies, Exxon and more, all want a piece of the action. The biggest threat comes from China. The world’s largest consumer of commodities is powerful enough to defy US sanctions and western regulators. Anything China can do to gain control over the flow of commodities will strengthen its geopolitical might.
These are my takeaways from the book. Keep an eye on the work of Blas & Farchy, they post about Glencore frequently. Here is a link to my first write-up.
BHP is the largest metals & mining company by market cap and Rio Tinto is the second.
Thermal coal is consumed mostly in emerging markets.
Adjusted EBIT: earnings before interest and tax, adjusted by management for non-recurring and other accounting items.
Glencore was working on the oil trade of 2020 before you and I knew lockdowns were a thing. They made $1.3bn from energy trading in the first half of the year.
The authors push back arguing that commodity trading has become an unpredictable business model which “relies on war, crop failure, mine strike or a pandemic to save the day”. I get the point but the world is chaotic and those events seem to be more and more frequent as of late. See the article: vol beneficiary
Glencore executives have bribed Russian oligarchs but they also watch football with members of the British establishment…
BNP pulled the plug on Trafigura after they got caught dealing with Cuba.
Critical metals & minerals are often found in difficult places. Cobalt is a good example. Glencore’s operations in Congo accounts for a third of the world’s supply.