COMMENT: Commodities 101, with Ivan Glasenberg

Glencore International’s ceo Ivan Glasenberg launched a scathing attack on the records of the departing ceos of rival miners at a capital markets conference this week.

Glencore International’s ceo Ivan Glasenberg launched a scathing attack on the records of the departing ceos of rival miners at a capital markets conference this week.

Glasenberg – who will take over as ceo of the combined Glencore-Xstrata entity when the deal is concluded, perhaps next month – lamented the “catastrophic” state of the mining business, which had collectively built too much new capacity, instead of keeping supply tight and margins higher for longer.

“That’s what we’ve got to stop doing as a mining industry. We’ve got to learn about demand and supply,” the executive was quoted by Bloomberg as telling delegates at the conference in Florida.

And he hoped mining bosses had “[...] learned their lesson. They built, they didn’t get returns for their shareholders. It’s time to stop building."

The comments come after Glencore’s rivals – Rio Tinto, BHP Billiton, and Anglo American – all recently switched their ceos, against a background of falling profitability and big writedowns.

Glasenberg has some tips for the new leaders: Sam Walsh at Rio, Andrew Mackenzie at BHP, and Mark Cutifani at Anglo.

Speaking just like the consummate trader he is, Glasenberg said: “What we’ve got to do, when the markets do get stronger, [is recognise there's] no need to keep building a new asset and let’s keep the market tight for a while.”

There are two main ways to look at this:

On the one hand, perhaps miners could benefit by injecting some of the instincts of the trader.

If miners were more used to seeking margins here and there, timing deals according to the ebb and flow of markets, perhaps they would be more disciplined in their approach to sustaining value.

They would be more alert to longer-term shifts in supply and demand, and more sensitive to the need for holding back to “keep it tight” and keep the buyers hungry.

It is applying the mentality of the big trading house to the management of capital expenditure over the longer term.

On the other hand, Glencore’s boss makes it all sound very simple but, well, isn’t hindsight wonderful?

It wasn’t that long ago that miners were kicking themselves – and being kicked by investors – for being too slow to anticipate the explosive growth of Chinese demand.

Suddenly the buzzword for commodities investors was "supercycle". In such circumstances, when the quickest movers on supply are likely to reap the biggest benefit, which single miner is going to resist expansion?

It may sound neat to transfer the ethos of the canny trader to the whole commodities complex. It’s less easy to see how to put it into general practice in a competitive market.

(Glasenberg himself dismissed any suggestion that his call to keep things tight could be seen as an attempt to reduce competition: “Not that we’re here to create an anti-competitive nature,” he said in the interview, lest anyone misunderstand his appeal to the collective “mining industry" as a call for an OPEC-style cartel.)

Competitive markets are cyclical: periods of abundance and overinvestment are followed by periods of discipline and underinvestment.

Two weeks ago, Barrick Gold’s ceo said his business had adopted a “new paradigm”, in which no big new mines would be built, and cash would be conserved.

We pointed out there was really nothing new in that. Now, Glasenberg has writ the idea large, for the whole sector.

“I hope we are in a new paradigm in the mining industry,” he said.

We are not. But we are hitting the inevitable, more conservative phase of investment. Rio, BHP and Anglo were seeing to that already, and Glasenberg’s austere advice just confirms it.

editorial@metalbulletinasia.com

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