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Glenstrata: The birth of a monster?

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COMMENTS

17 October 2012 14:15

Dr Daniel Woker is the former Swiss Ambassador to Australia, Singapore and Kuwait and now a Senior Lecturer at the University of St Gallen. 

The planned fusion of the mining company Xstrata and the commodity trading company Glencore will create a very large organisation that could influence the demand and supply of  commodities vital for production globally. This proposition becomes all the more ominous at a time when traders, supported by large banks, are moving into the securitisation of commodity trade finance.

These developments raise the spectre of a new 'too big to fail' problem that governments and regulators would be advised to tackle early.

The ongoing economic soap opera around the planned merger of one of the world's largest, and certainly the most diversified, commodity traders, with a miner in the world's top five, is of strong significance to both Australia and Switzerland: the two companies have their headquarters in Zug, Switzerland and pay corporate taxes there, but Xstrata to a considerable extent is Australian, since it derives about a third of its business from its mines there.

Even though the deal is far from done, there are three main points that should be examined: money, the different natures of the companies and the public interest in the type of company 'Glenstrata' will be.

So far, the discussion between the senior managers of the two companies and their shareholders, and the running commentary in the media, has been all about money. 'Qatar Inc', the second largest holder of Xstrata stocks after Glencore is likely to approve the merger, including the very high retention bonuses for Xstrata's top management. Those bonuses may prove too much for other stockholders, however. Xstrata's chief executive, Mick Davis, won't get a bonus and will stay on for only six months after the merger, leaving Glencore to call the shots after that. It is only fitting that Glencore should manage the merged company since it is the main driver of the deal which will catapult Glenstrata into a potentially market-dominating position.

To understand what kind of company Glenstrata will be, it is necessary to examine the histories of the two companies to see the differences between them.

Glencore has its distant roots in the granddaddy of metal traders: Philipp Brothers (later Phibro). During the 1970s, the company employed and then fired a particularly successful but unscrupulous trader by the name of Marc Rich. Rich started his own company and was quite successful until he ran into serious legal problems in the US, where he was accused of cheating on taxes and, more seriously, 'trading with the enemy' because he had continued to buy Iranian oil after the fall of the Shah. Rich found legal sanctuary in Switzerland, his company paid a fine, and he procured a pardon from outgoing President Clinton. His partners bought him out of the business at the beginning of the 1990s and the company was renamed Glencore. Under the leadership of Ivan Glasenberg, Glencore is known to go where others fear to trade and now specialises in mining operations in newly emerging countries.

Xstrata began as Südelektra, an old Swiss company active in energy production in Latin America. Marc Rich bought his first stake in 1990 (to give him access to the Swiss capital market) and it became Xstrata in 1999. The company really took off in the early '00s when it listed on the London Stock Exchange and its chief executive, Mick Davies, bought South African coal mines from Glencore.

Privately-owned Glencore did little to engage with the outside world until its listing in London in 2011. By contrast, Xstrata's Davis is on the International Council on Mining and Metals, established in 2001 'to improve sustainable development performance in the mining and metals industry', and Xstrata has led the Dow Jones Sustainability Index in the mining sector since 2006. 

One concern about the corporate creature that results from the merger is that its culture will derive from the lowest common denominator – Glencore.

The broader concern is that the merged entity has a market-dominating position both by its functions and its size. By the joining together of one of the world’s largest and most diversified commodity traders with a huge global mining entity, a new type of beast will be born: a vertically integrated, and very large, company with a clear potential to influence demand and supply of at least some commodities vital for global production. The challenge for industry and regulators is to negotiate a clear and sensible international framework governing both the substance and the financing of the commodity cycle, from mining, through trading, to the end user.

The International Organization of Securities Commissions, an umbrella group of financial regulators, and other public sector bodies are springing into life. But as the global financial crisis showed, 'the market' will not automatically make things go right for the overwhelming majority of us. 

Photo by Flickr user stopthegears.

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