Worries continue for commodity traders

Glencore shares up, after a crash, on clarification by firm but many Swiss-based traders under stress

After crashing on Tuesday, the share price of London-listed Glencore, the Anglo-Swiss multinational community trading and mining company, rose 29 per cent after the company hastened to clarify some issues on its operations and finances.

The crash was after an investment brokerage's note became public, pointing to a debt base well above its peers and a lower-margin asset base. The brokerage also warned of a scenario in which earnings could collapse entirely.

Glencore stated: “Our business remains operationally and financially robust – we have positive cash flow, good liquidity and absolutely no solvency issues. We are getting on and delivering a suite of measures to reduce our debt levels by up to $10.2 billion.”

However, falling commodity prices, especially of metals, is likely to haunt commodity traders and manufacturers for more time, experts opined.

Glencore had recently announced a sharp production cut in its copper mine, as prices are trading around a six-year low. Its share price was falling sharply —this is also an industry issue. Trafigura, another commodity player, has seen its bond price dropping 10 per cent in a month, indicating market worries about the impact of the commodity rout on companies’ fundamentals. Another Swiss-based commodity trading company, Mercuria, sold a majority stake in centuries-old metals storage company Henry Bath to China's CMST Development Co. Henry Bath is among the largest warehouse companies on the London Metal Exchange and Mercuria had acquired it only a year before.

China has set its sights on grabbing stressed commodities assets globally. All the three commodity houses mentioned earlier are based in Geneva. Commodity traders have been drawn to Switzerland because of its laissez-faire regulation and low taxes. The $21-billion industry generates more revenue than tourism. With Glencore’s woes in the headlines focusing analysts’ attention on the sector, there has been criticism that Switzerland has allowed traders to damage the environment and turned a blind eye to human rights abuses in the countries where raw materials are extracted.

Bloomberg data shows Trafigura, Mercuria Energy Group, Gunvor Group and Vitol all have major operations at Geneva and trading accounts for more than 10 per cent of gross domestic product, according to the Swiss Trading and Shipping Association.

Jean-Francois Lambert, global head of commodity and structured trade finance, HSBC, told Business Standard:“In a situation where commodities prices are yet to bottom out, companies should wait for these to find their lows. So, timing of the acquiring of assets and understanding of market dynamics are extremely important. Several commodities, including metals and oil, are in an oversupply zone. If someone is in a hurry, it is likely that they might catch the wrong bus.”

T Gnanasekar of CommTrendz Research said, “Till China’s buying improves, the commodities market will see stress. However, the way China is handling the situation, I feel its demand could improve in neat future. However, we cannot say the worst is over because the US Federal Reserve has yet not increased interest rates. Whenever it happens, commodities might come under further stress.”

Andrew Cole, analyst with London-based Metals Bulletin, said: “We've been forecasting a modest turnaround in the metal markets once the dust settles and the fundamentals have a chance to reassert themselves. In some of the base metals, like copper and lead, the fundamentals are actually pretty okay. However, that seems to be the minority view and there is a lot of panic out there, which is self-fulfilling.”