During the 1970s, commodities trader Marc Rich built the global spot market for crude oil. He made billions but had to do business with regimes like Iran, Cuba, South Africa and Libya. It raised lots of concerns, and Rich was eventually indicted for tax evasion in the early 1980s (President Bill Clinton pardoned him in 2001).
But Rich’s firm continued to thrive and is now called Glencore International. Over the past year, revenue surged to $145 billion from $106.4 billion, with profit up 39% to $3.8 billion.
Glencore is now set for an initial public offering. With a valuation of about $70 billion, the firm anticipates raising about $11 billion. The shares will be listed in London and Hong Kong.
But the deal is raising some concerns. Perhaps the most important: Is this a sign that the commodities bull market is nearing an end?
Glencore has a global footprint and has intelligence across nearly all important commodities markets. In other words, the company should have a good understanding if the markets are getting too frothy, right?
In 2007, the world’s largest private equity firm, the Blackstone Group (NYSE:BX), went public. The price reached $35 on its first day of trading. But within a year, the private equity industry collapsed and so did Blackstone’s stock price. It would eventually fall below $4.
Glencore senior executives have actually been dealing with a similar timing issue. To allay fears, they have agreed not to cash out their holdings at the IPO. They will also hold their positions for up to five years.
Glencore says it needs to be public to use its stock as currency for acquisitions. While the trading business is profitable, it can have big swings. Thus, Glencore appears interested in buying mining companies. Already, the firm has an 8.8% stake in United Co. Rusal, which is the world’s top aluminum producer and a majority position in Minara Resources, a nickel producer.
But the biggest asset is a $24 billion stake in Xstrata. It has large mining operations for coal, zinc and copper. If there is a merger with Xstrata, it would turnGlencore into a commodities powerhouse on par with firms like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RIO).
Despite all this, there are still many top investors who are skeptical about the commodities market. Last week, Goldman Sachs analysts made broad recommendations against holding commodities, such as oil, copper and platinum. The belief is that the slower global economy will put pressure on prices.
But keep in mind that commodities markets can have brutal corrections. It’s a natural part of the business.
Over the long run, the fundamentals still look positive for commodities. Of course, China has ambitions to continue its aggressive expansion. At the same time, there are constraints on supplies. Simply put, it is getting tougher to find and extract commodities. Even global warming is likely to have an impact, with adverse weather making it difficult for farming.
It’s no surprise that there continues to be strong institutional interest for commodities. This includes mutual funds, private equity firms and even sovereign wealth funds. And they will want to own stocks like Glencore. If anything, the IPO may be just the beginning of public offerings of other large commodities traders.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
