Does Glencore's float mark the top of the commodities boom?

Commodities giant Glencore is going public, aiming to raise $11bn on the stock market. That means there's one question that every contrarian investor will be asking themselves: is this the top of the commodities market? John Stepek investigates.

By John Stepek

published 14 April 2011

in Features

Giant commodities trader Glencore has confirmed that it's planning to list on the London and Hong Kong stock exchanges.

The Swiss group hopes to sell up to $11bn of shares (most of it in London), with prices set to be announced in the middle of next month. It's set to be the biggest initial public offering (IPO) in the world this year and the UK market's biggest ever.

There's one glaringly obvious question that any contrarian investor will ask themselves when a big company like this decides to go public.

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Does this mark the top of the market?

When big companies go public, it's often a bad sign

History tells us that when big companies go public, it's often a bad sign for their markets. Goldman Sachs went public in 1999. The tech bubble (which produced lots of lovely fees for investment banks) burst shortly thereafter.

Blackstone Group the private equity giant listed in 2007. The credit bubble (which helped the private equity industry scale the heights with bigger and bigger deals) had already started to collapse at that point, though the mainstream media hadn't quite realised it.

So does the Glencore float mark the top of the commodities market? Is this the smart money cashing out before the boom ends?

Chief executive Ivan Glasenberg says not. He tells Javier Blas at the FT: "Nobody is cashing out or taking money off the table. The idea of the shareholders cashing in and that the IPO of Glencore is the top of the commodities cycle is totally incorrect."

Of course, he would say that. He can't turn around and say: "Well, now you mention it, we thought China was looking a bit wobbly, and we've had a good run at things. What with monetary policy looking like it might start being tightened around the world, we thought we'd raise cash from the mug punters while we still could."

To be fair, senior partners are locked in for four to five years. And Glencore has been looking for a way to expand for ages there was an abortive merger with Xstrata, for example. The motivation for listing is to attain the firepower to buy up mining assets that it couldn't afford as a private company. So if anything, Glencore's float could result in more merger and takeover mania in the mining sector.

There are plenty of threats to the commodities boom

However, there are lots of reasons to be wary on commodities right now. It's easy to spend too much time focusing on the developed world, and the inflation vs deflation debate going on there.

The Bank of England and the Federal Reserve are both saying that inflation should be ignored. The European Central Bank is the only major central bank raising interest rates, and that's as much to do with defending the euro's strength as with concerns over inflation.

But as far as Asia and emerging markets are concerned, the inflation / deflation debate is over. There's no question that inflation is a problem for them. And they're increasingly trying to tackle it.

Towards the end of last year, there was a lot of talk of 'currency wars', sparked mainly by a catchy soundbite from Brazil's finance minister. But it looks as though emerging market countries have now given up the fight. They're much happier to let their currencies rise in an attempt to stave off inflation.

This morning Singapore said it will allow the Singapore dollar (one of Tim Price's favourite currencies, incidentally) to move higher as economic growth keeps surprising on the upside. Meanwhile China, which is expected to report inflation above 5% for March, has allowed the yuan to hit a 17-year high against the dollar, reports Bloomberg.

China in particular is a worry. If it succeeds in slowing its economy down, then where is all this demand for commodities going to come from? Alternatively, the world's central banks even in Asia may already be too far 'behind the curve' to stop inflation from taking off. But then commodity prices would simply rise until they become too expensive, destroying demand for them, and sending prices sharply lower again.

A great deal hinges on the Federal Reserve

I'm not saying that commodity prices have peaked. And with the Japanese effectively doing quantitative easing part three, pumping money into the system in the wake of the earthquake, perhaps the cheap money in developed worlds will continue to prop up markets even as emerging countries tighten.

But so many commodity-dependent assets at near record highs (just look at the Aussie dollar for example) that it would be stupid not to at least start being cautious. Particularly when you have dirty great red flag like Glencore going up. Perhaps the key as Dave Kansas noted in the Wall Street Journal earlier this year is to watch if the company's peers, such as US group Cargill, start to mutter about floating too.

And of course, a great deal hinges on what happens with quantitative easing in the US later this year. We'll be looking at what might happen when (and if) QE2 ends in more detail in a forthcoming issue of MoneyWeek magazine.

But this is clearly going to be a year of transition for investors. Which is why you should clear your diary for Friday June 17th. Because that's when we're holding MoneyWeek's first-ever conference. Merryn Somerset Webb and our regular contributors including Tim Price, James Ferguson and Dominic Frisby (and more) will all be speaking, with their views on the markets and latest share/investment tips. The conference will be held in central London, and start around lunchtime. So do mark that date in your diary now. We'll have more details for you very soon.

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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.