Glencore (LON:GLEN) Struggling to Weather Commodity Slump

August 20th, 2015 by

Glencore Plc (LON:GLEN), one of the world’s mining giants, has been hit especially hard by the downward trend for commodities. Not only have Glencore’s mining operations suffered over the last year along with the rest of the mining sector, but the company’s trading desk (which focuses on the metals and other commodities) is also losing out amid the plunge in prices for resource like oil and copper, which are both at six-year lows. Shares lost more than 9% on Wednesday, wiping out some $3.5 billion in market cap. Just this year, shares of Glencore have lost 46%, rendering it the worst-performing stock on London’s FTSE 100 benchmark index.

glencore

The company is also working to reduce its nearly $30 billion debt load. Paramount to Glencore’s success going forward is its ability to maintain its credit rating, which is hovering at the lowest investment-grade level of BBB. Many analysts feel that the company’s ratio of debt to EBITDA (earnings before interest, tax, depreciation, and amortization) would need to run below 3.0 in order to avoid a credit downgrade. According to a note from Morgan Stanley, the company’s current debt:EBITDA ratio is around 3.4.

Billionaires No More

Glencore CEO Ivan Glasenberg has cited aggressive selling by hedge funds in China and the U.S. as the reason for the dramatic slump in commodity prices, expressing his belief that these markets will recover when fundamentals come back into play (rather than trader behavior driving price movements). The uncertainty over what direction China’s economy will go is exacerbating the lower prices. Whatever the cause, the slump in commodity prices from copper to crude oil is weighing on Glencore’s bottom line.

Source: Bloomberg

Just four years ago, Glencore’s initial public offering brought the company’s stock price above $500 per share, generating untold wealth for its executives. Six separate individuals amassed stakes in the company worth over $1 billion following the 2011 IPO, but the company’s shares have fallen in price each of the last five years, leaving half as many billion-dollar shareholders from the original six—and two of them only tenuously so.

Bearish Forces

Beyond Glencore’s own fortunes, it is true that traders have taken a dramatically bearish position in the commodities sector. Irrespective of fundamentals, a record number of short positions have been opened in copper futures, even as Grasenberg and others point out that global inventory levels and net flows of physical commodities wouldn’t indicate such low prices. This does bolster the claim that trader behavior is driving the rout in commodity prices, though the bigger factor to watch is undoubtedly China.

Map showing China's extensive resource deposits.</center

Map showing China’s extensive resource deposits.

The Chinese markets have been full of uncertainty over the past several weeks, with seemingly one worrisome sign after another coming from the world’s second-largest economy—not to mention that it is both the world’s largest importer and exporter, with much of its trade coming from raw commodities and natural resources. Between the confusion surrounding the yuan, the plunge for Chinese stocks, and the gradual slowing of the country’s manufacturing and overall economic growth, any company whose business is heavily entrenched in China (as nearly all miners and commodity traders, of which Glencore is both, are) is going to feel the pain of these risks. What remains to be seen is if Glencore can manage such risks and keep its credit rating above junk status.