Glencore share collapse reflects fear of fresh crisis in a pessimistic market
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Version 0 of 1. Stock markets are fickle places. When Glencore, the mining and commodity trader, was floated in the spring of 2011, the assumption was that the shares would be the hottest property around. China was booming, fears of a second Great Depression were fading, central banks were pumping money into the financial system through quantitative easing. What was not to like? Quite a lot as it happens. Glencore peaked early and its share price has been on a downward trend ever since it joined the FTSE 100. The company has been the FTSE’s worst performer in 2015 and has fallen by 55% in the past year. After another big drop on Wednesday, investors could pick up Glencore shares for 159p against an offer price of 530p. You don’t need to be a genius to work out why Glencore’s shares are on the slide: the company’s profits are being hit badly by the sharp fall in commodity prices that has accompanied the more than halving of the cost of crude oil in the past year. Copper prices, for example, have dropped by 25% as global demand for metals has declined. There are three main reasons for the slump in commodity prices. The first is that they were too high in the first place, driven higher by QE-financed speculation. The second is that production has increased, leading to a supply glut. The third is that demand has not lived up to expectations, with China’s economic slowdown having a marked impact on exports from commodity-producing countries. Brazil, heavily exposed to the drop in metals’ prices, is experiencing a nasty bout of stagflation. Glencore has responded in textbook fashion: it has cut operating costs, sold assets and taken the axe to capital investment. This, however, is merely a temporary solution for a company with high debt and falling revenues. What Glencore needs is for growth to pick up in China, for the tentative recovery in Europe to gain traction and for the looming increase in US interest rates to cause no more than a ripple in the rest of the global economy. That looks unlikely. China is on the edge of a hard landing if not already suffering from one. Europe’s recovery is and will remain modest. Emerging market economies in Asia, Latin America and Africa look highly vulnerable to a tightening of monetary policy from the Federal Reserve. Glencore’s share price reflects the sense that a fresh financial crisis is more likely than a surge in commodity prices. |