Glencore: in a deep hole

Glencore's heavy debt load and the low price of metals have sent investors in the commodities trader running for the door.


Investors are fleeing the commodities giant

Shares in mining and commodities trading giant Glencore plunged by 30% last Monday. The slump was due to more poor Chinese data and a note from Investec saying Glencore's equity could be worthless if metals prices stay low. The main worry is the group's massive debt load of $30bn. Scepticism over its ability to cope with this debt is growing. The price of insuring Glencore's debt against default has jumped to the highest level since the global crisis in 2009.

On Tuesday, Glencore said it remained "operationally robust" and had access to "strong lines of credit". Citigroup said the company looked undervalued and should consider going private if the stockmarket failed to value it fairly. The shares bounced but remain around 80% below their 2011 flotation price.

What the commentators said

One major problem, as Jim Armitage pointed out in The Independent, is that "nobody knows when, if, or by how much, demand for Glencore's products will return". Its own forecasts havebeen too bullish in recent years. There are also recurrent questions about what is happening at its commodities trading division, an "inherently opaque" business. It says its debt-funded positions are all hedged and its balance sheet can cope, but "there are niggling doubts".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So what next? "One has to admire the chutzpah" Citigroup has displayed with its suggestion that Glencore go private, said Nils Pratley in The Guardian. Investment banks have done extremely well out of it ever since its overpriced floatation. The recent share placing, which Citigroup helped set up at 125p, was just the latest bonanza.

Now Citigroup is lining itself up for more fees from a buyout, and is even floating the idea of another flotation a few years down the track. How absurd. The last thing this overleveraged company needs is "another layer of buyout debt". Instead, it should be selling some assets "at half-decent prices" to get its debts down.

Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.