Glencore CEO cuts zinc output in battle with funds distorting prices

Zinc production has been cut by a third in a bid to stoke a rebound in the metal that's trading near a five-year low

US Glencore Plc billionaire Chief Executive Officer Ivan Glasenberg has declared war on the hedge funds he says are distorting commodity prices and intensifying a price slump.

The outspoken mining industry figure announced a plan to cut zinc production by a third in a bid to stoke a rebound in the metal that's trading near a five-year low. It worked: zinc surged by the most since at least 1989, leading advances for all metals.

The company's stock also gained, extending a rebound to more than double from last week's record low. The move came days after Glasenberg told a conference in London that commodity prices don't reflect supply and demand and followed similar cuts to copper and coal production. He's navigating a collapse in raw materials that's wiped $37 billion from the miner and trader's market value this year.

"Glencore is showing industry discipline by cutting unprofitable tons and saying it is worth more value to leave the tonnes in the ground," Heath Jansen, a Citigroup analyst, wrote in a report. "We expect assets to remain out of production until zinc prices improve materially and stay higher."

The Swiss company is restructuring its finances and operations as it seeks to allay investor concern it carries too much debt. As one of the world's biggest suppliers of base metals such as copper, nickel and zinc, Glencore's metals and minerals businesses delivered about 30 per cent of its revenue last year.

"It's clear that there's distortions," Glasenberg said Monday. "How big they are we don't know, but eventually the fundamentals will prevail. The funds are playing various commodities on the derivatives side. Eventually the physical will drive the actual commodity price."

The move is unlikely to affect analysts' earnings estimates for the company or cash-flow forecasts as the operations are unprofitable at current prices, according to Citigroup.

Annual zinc output will fall by about 500,000 metric tonnes as Glencore suspends or cuts output from mines in Australia, Peru, and Kazakhstan. Global production was 13.3 million tonnes in 2014, according to the US Geological Survey, making the reduction equivalent to almost 4 per cent of world output.

"Maybe they are the trailblazer, as there's the specter of oversupply in many commodities," James Wilson, a Morgans Financial analyst, said by phone from Perth. "If you want higher prices for a commodity, you need to create price tension and to have less product in the market. Glencore's doing that, though maybe under duress, and it's something that other big companies should be thinking of."

The curbs will shave about 100,000 tonnes from its fourth- quarter output, Glencore said, while production of other metals including lead and silver will also be affected. Zinc rallied as much as 12 per cent to $1,875 a ton on the London Metal Exchange, the highest since August 11. Prior to Glencore's announcement, it had fallen 23 per cent this year.

"The main reason for the reduction is to preserve the value of Glencore's reserves in the ground at a time of low zinc and lead prices, which do not correctly value the scarce nature of our resources," the company said. Glencore is "positive about the medium and long-term outlook for zinc, lead and silver prices."

Glencore climbed 7 per cent to close at 129.1 pence in London on Friday. Earlier in the day, the stock surged as much as 16 per cent to more than double from the low on September 28, when it plunged by the most since the firm's initial public offering in 2011.

The shares had slumped after analysts expressed worries over the pace of its $10 billion debt-reduction programme. Glencore erased those losses after refuting the concerns and as investors including the sovereign wealth fund of Singapore were said to have expressed interest in a minority stake in its agriculture business.

David Herro, the head of international stocks at Harris Associates, one of Glencore's biggest investors, said that he supports the company's debt-reduction plan. Herro, who manages the $27 billion Oakmark International Fund, said in August that he was making a long-term investment in Glencore because the business was "substantially undervalued."

Commodities prices have slid in recent months as producers of metals to energy struggle to curb surpluses due to slower economic expansion in China. The nation accounted for half of the world's refined zinc consumption in 2014, according to Bloomberg Intelligence. The worst of the collapse in prices is probably over, according to Pacific Investment Management Co, which manages $15 billion in commodity assets.