TREVOR TARRING Glencore: what a difference an IPO makes (or does it?)

For many months now everybody else in the metal business has been concerning themselves with one aspect of Glencore's business more than any other: namely its interest in absorbing Xstrata in which it "only" owns 34%.

For many months now everybody else in the metal business has been concerning themselves with one aspect of Glencore’s business more than any other: namely its interest in absorbing Xstrata in which it “only” owns 34%.

They have also been aware that Xstrata’s feisty ceo Mick Davis has every interest in playing hard to get for as long as possible.

Now that the open secret of Glencore’s move to an IPO in May or so has been made official, the interest in this topic has spread to the financial papers and the bar rooms of the world’s financial centres.

Apart from the fascinating specifics of the question, there is also debate on a no less fascinating historical question: is this the first time a merger on this scale between a trader and a miner has been contemplated?

The question of scale is easily resolved as far as Glencore is concerned.

It is by far the largest metal trader now and arguably the largest the world has ever seen.

Bearing in mind that its corporate genes go back through Marc Rich to Philipp Brothers, the equally dominant metal trader from the 1950s to the late 1970s, this position is hardly surprising. Indeed, the rise of Marc Rich and the decline of Philipp Brothers occurred in parallel.

But unlike Philipp Brothers for all but the last few years of its existence (as Engelhard), Glencore is much more diversified from metals into other commodities. Xstrata, on the other hand is fifth on a world ranking of metal miners by market capitalisation; it also has a much shorter pedigree than Glencore.

For the purposes of this debate, however, both Glencore and Xstrata can be called a big trader and big miner respectively. So the question of whether their corporate cultures are sufficiently compatible for a merger to work is a very real one.

Engelhard was not a miner but a refiner and processor; but history shows the incompatibility of its corporate culture with that of Philipp Brothers was damaging to both parties. But again, today’s Glencore is already much more directly involved in mining within its existing corporate culture than Philipp Brothers ever was.

If it truly has already cracked the problem of running mining and trading operations within one company, then it has outpointed all previous attempts to do this.

The big names before and just after World War II, such as Metallgesellschaft, British Metal Corp and the Japanese zaibatsu, all had a foot in both camps.

Metallgesellschaft, British Metal Corp have gone and the Japanese companies, while still huge, have slipped down the world league table.

Later, in the 1970s, several of the vertically-integrated aluminium majors (Alcan, Kaiser, Pechiney) made a pass at adding an in-house trading capability and produced some successful traders; but they all ended up in genuine trading companies and the majors went back to producing.

So far, so bully for Glencore.

But its ability to walk on water as a truly dual trading/mining business has not yet been tested the way it would be by a merger with Xstrata for the simple reason that its existing mining/smelting activities have all been outgrowths from its trading.

Only when a trading company successfully manages a mining operation that began through a classic mining company initiative can it say it has cracked this longstanding dilemma. And Xstrata has several of these.

No element of the foregoing should surprise any Metal Bulletin reader, though it might some of the new experts who have come on the scene only since the Glencore IPO became a much stronger possibility.

But what rehearsing all these points does make clear is that it is the question of corporate culture that is paramount for the future.

Against that, whether Glencore makes a pass at Xstrata with or without an IPO is largely a technicality.

Trevor Tarring is the former chairman of Metal Bulletin plc