Glencore’s commodity billionaires face their reckoning

The aim of every trader is to buy at the bottom and sell at the top and Ivan Glasenberg, chief executive of Glencore, came tantalisingly close this week. Thursday’s sudden plunge in commodities including oil, copper and precious metals such as silver and gold was a last-minute hitch.By John Gapper

If Thursday’s upheaval does not derail the initial public offering of the Swiss commodities group – and investors were still bidding for its shares on Friday in spite of the reverse – then five of its 485 partners will become billionaires and others will be close behind. In their rapid ascent to extreme wealth and notoriety, Glencore’s partners almost rival Mark Zuckerberg and the “accidental billionaires” of Facebook.

How resilient their commodity-backed riches will prove is another matter. The “risk-on” trade – buying everything tied to the growth of emerging markets led by China while selling the dollar and buying gold – abruptly reversed on Thursday. Inflation fears eased in advance of the release of jobs’ figures in the US, and the expected end of the Federal Reserve’s ultra-loose monetary policy.

It accentuated the comparison between Glencore and Blackstone, the private equity group whose 2007 IPO marked the top of the debt bubble. Mr Glasenberg’s stake in Glencore could be valued at $10bn this month but he will be as vulnerable to a post-IPO descent as Stephen Schwarzman of Blackstone, whose wealth fell from $7.8bn that year to $2.5bn two years later, according to Forbes magazine.

Whether this week’s commodities reverse turns out to be a crash or merely a correction, it is a sharp reminder that commodities such as silver have always been prone to booms and busts, as well as wild speculation. Silver, a gold substitute for small investors piling into metals, fell in value by 30 per cent in the week up to Thursday.

Like internet companies, commodity groups are acutely vulnerable to swings in market sentiment – shares in the Chinese social network Renren rose 29 per cent on the day of its IPO this week but fell sharply again the next day. Facebook’s private valuation has been shooting up ahead of its IPO next year, and Mr Zuckerberg’s stake is worth perhaps $12bn.

The simultaneous booms in commodities and technology that have minted new billionaires in both Silicon Valley and Asia are reflected in the Forbes annual list of the world’s billionaires. Robin Li, the chief executive of the Beijing-based internet search group Baidu, is as rich as Mr Glasenberg, and this year’s list includes a plethora of Russian commodity tycoons.

Commodity volatility is not new to 54-year-old Mr Glasenberg, whose prospectus points out that Glencore’s markets are “fragmented or periodically volatile”. His wealth and that of his fellow partners is partly due to the low price at which they bought the company from Marc Rich, its founder, after the zinc market abruptly turned on him.

Mr Rich, the near-legendary figure who invented the oil spot market in 1974 and was later indicted by the US on charges of tax evasion and trading illegally with Iran, sold Glencore (then called Marc Rich & Co) to its other partners for $600m in 1994. This month’s IPO is likely to value it at about $60bn.

As Daniel Ammann records in his book The King of Oil, Mr Rich was under pressure from both the indictment and a failed attempt to corner the zinc market by a Glencore trade that had cost the company $172m. The commodities market was in the doldrums, and the sale proved to be a poor trade for him.

The latest rush of excitement over commodities derives from the view that we are in the middle of a long wave of demand (also known as a Kondratiev wave, after the Russian economist Nikolai Kondratiev) for raw materials, driven by the rise of China. Aligned with this have been fears about dollar devaluation and inflation, which prompted a flight into gold as a currency hedge.

In the long run, it is hard to dispute the power of China, now the world’s second-largest economy. As Longview Economics points out, China was responsible for nearly all (and for some commodities more than 100 per cent of) the rise in global demand for copper, aluminium, steel, tin and coal between 2000 and 2010. Without China’s rise, Glencore’s partners would be far poorer.

But plenty of traders and investors have mistaken a short-term price signal for a long-term demand trend before, and suffered for it. The commodity boom of the 1960s culminated in the Poseidon crash of 1970 in London, after an Australian nickel mining company triggered frenzied speculation by announcing a find at Windarra in 1969. Metals such as copper and silver sound like more solid investments than internet traffic or the virtual users of social networks such as Facebook. Yet commodities trade on futures markets and retail investors can now take a punt on them through exchange-traded funds, which encourages speculation and rapid run-ups in prices.

Glencore’s partners may not be too worried. Mr Schwarzman’s wealth has recovered from the crash – it was estimated at $5.9bn by Forbes in March this year – and Mr Glasenberg is already a billionaire. The corollary of a rapid rise in commodity-based wealth is volatility in its day-to-day level. What copper, oil and gold give, they can also take away.

source: Financial Times, May 6 2011:

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