15/07/2010 - 00:00

Glencore manoeuvres put WA on notice

15/07/2010 - 00:00


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Commodity trader Glencore could be set to float, a sure sign of its confidence in the future of the resource sector.

WITH Europe in meltdown, and the US growing slowly, it might seem premature to predict the return of the resource boom, though not if you analyse what’s happening at the world’s biggest commodity trader, Glencore, and its key Western Australian business, the nickel-miner Minara Resources.

Last week, Minara announced a $111 million return of capital, claiming that it was “in a strong financial position” and, by inference, didn’t need all of the $210 million in fresh capital raised as recently as 18 months ago when the world was peering over the abyss of economic collapse.

Minara was sending two messages, both positive for WA. Recovery in the nickel price means that it can self-fund its capital requirements, and that recovery in the overall commodity sector means that its parent, Glencore, is preparing for the return of the boom.

Important as it might be locally, Minara is really nothing more than cash cow for Glencore, a secretive Swiss business that also controls Xstrata, one of the world’s top five miners.

Small as a business that turns over $US106 billion a year might be in the Glencore stable, Minara’s capital management exercise represents the return of $78 million to its 70.6 per ent parent, just as it gets ready for a mighty shake-up.

Events in Baar, a Swiss village close to Zurich, might not seem important in Perth, but when you connect all the dots what you have is ...

• The world’s biggest commodity trader re-shaping itself.

• The new structure being designed to handle a boom, not the bust we’ve just experienced.

• The possible creation of a company to rival BHP Billiton and Rio Tinto, especially if Xstrata is dragged in.

• A structure designed to succeed in a ‘commodity constrained’ world where prices are more likely to rise than fall.

• A structure which will be so big, and based in a low-tax country as Switzerland, that a takeover bid for a rival as big as Rio Tinto might not be out of the question.

Glencore’s problem, which is actually WA’s good fortune, is that the future for commodities looks so rosy, especially given the strength of demand in Asia, that it will struggle to grow in its current status as a private partnership.

To get bigger, and handle the deals of the future, Glencore must access the world’s capital markets, probably as a company listed on the New York, London and Zurich stock exchanges.

Talk of a Glencore float was about a few years ago, but was killed by the 2008 global stock and commodity markets’ collapse.

Today the float is back, with the chaps in Glencore’s head office working on a new structure that will enable them to ‘monetise’ the capital they have tied up in a private partnership; and that means getting the highest possible price in the float, at the best possible time.

Which is why Bystander believes watching how Glencore manages its capital structure is one of the best signs around that the worst of the downturn is behind us, that asset values are more likely to rise than fall in 2011, and that cash parked on the sidelines for the past few years will willingly subscribe to a world-class commodity focused story.

WA in the box seat

GLENCORE’S looming float is not the only clue that clever people see a bright future in the commodity world. Management consulting firm McKinsey and Company is also advising clients to get ready for a commodity constrained world.

More of a warning than an optimistic assessment, McKinsey reckons a shortage of raw materials (the stuff we sell) will be ‘one of the next decades’ critical pressure points’.

Much of its assessment of the future is focused on oil and other sources of energy, but there is a common signal that flows through to all commodities – that the mines and farms of today will struggle to meet future demand.

Copper is McKinsey’s chosen metal case study because it is a critical part of modern society, finding a use in everything from power generation to plumbing.

“More than half the world’s copper production is concentrated in a handful of countries with limited infrastructure and high extraction costs,” the consulting firm wrote in a recent review of the big issues confronting the world.

But, the clincher in terms of how the world is returning to resource-boom conditions, came in this observation: “Producers know that, over the long term, demand for copper can only grow. At the same time, they’re wary of investing in infrastructure ahead of the demand cycle – a strategy which practically guarantees future pricing volatility.”

Where McKinsey says volatility commodity experts such as those at Glencore are reading ‘increase’ or, interpreted another way, ‘no new spending’ on copper mines, coupled with Asian demand, means that the price of copper must rise – a situation which also exists with nickel, zinc, iron ore and just about any commodity you care to name.

Not-so-super plan

ON a totally different subject there was much interest last week in a major report into Australia’s superannuation system where wholesale changes are planned to an industry that is envy of the world.

Improvements are always welcome, but change for the sake of change is never wise; and that’s what appears to be at the heart of the review headed by ASIC lawyer, Jeremy Cooper.

Of particular concern was this point, first picked up by seasoned super critic and investor adviser, Bruce Brammall.

It was Mr Brammall who slammed the Cooper review for saying on its front page that super-fund members “should not have to be interested, financially literate, or investment experts to get the most out of their super”.

Said quickly, it might make sense. Considered slowly it is just plain stupid, because if there’s one duty we all have it is to take an interest in how our retirement savings are managed.

Leaving your super to a government-licensed ‘expert’ is an opt-out suggestion. Rather than creating a system for dummies we should be building a system based on enhanced knowledge and interest in our own financial affairs.


“Fool me once, shame on you. Fool me twice, shame on me.”

Chinese proverb



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