sábado, 5 de septiembre de 2015

sábado, septiembre 05, 2015

Slumping Commodities Force Glencore to Make a Tough Trade

Swiss mining and trading giant could risk denting its earnings power in an effort to cut debt

By Helen Thomas

Sept. 2, 2015 9:03 a.m. ET
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Glencore CEO Ivan Glasenberg. The embattled commodities giant could free up cash in its trading business, but that raises the risk of denting its earnings power. Glencore CEO Ivan Glasenberg. The embattled commodities giant could free up cash in its trading business, but that raises the risk of denting its earnings power. Photo: Reuters

There is a paradox at the heart of Glencore GLNCY -9.09 % ’s business: The commodities powerhouse has ways to stabilize its balance sheet, but doing so could undermine the might of its trading machine.

Glencore said last month that it had reduced working capital in its trading business by about $4.7 billion. Of that, $1.5 billion came from squeezing very short-term debt used to fund the business, while $3.2 billion was found elsewhere, such as inventories.

This releases cash for the trader-cum-miner, helping to cover spending and reduce Glencore’s relatively high net debt. That is vital at the moment: those debt levels have made Glencore a target as commodities prices have slumped: its stock has collapsed, down 40% over the past month, in part on fears of a need for it to raise additional equity.

With commodities in a severe funk and many fearful it could get even worse should China’s economic situation deteriorate further, the ability to pull capital from trading is an important lever for Glencore. It is a tool the company’s pure mining peers can’t deploy and may help Glencore forestall the need to raise additional equity.

But, as Glencore does so, it will become tougher to generate profits. Commodities trading is a low-margin business that requires churning large volumes.
 

Glencore already faces an earnings challenge. Its earnings guidance for trading targets operating profit of $2.7 billion to $3.7 billion a year. Yet first-half operating profit in trading, at $1.1 billion, fell short of that level. The company thinks it can make up most of the shortfall, hitting a reduced full-year target of $2.5 billion to $2.6 billion.

But the need to reduce working capital may make that more difficult, even if the direct link between that and profits isn’t exactly clear. The trading unit has, on average, made about a 13% return on capital employed, according to Morgan Stanley. MS -3.86 % It made about 14% last year. On that basis, cutting working capital by $4.7 billion theoretically could wipe some $600 million from annual operating profit.

But that outlook is too severe. About two-thirds of Glencore’s reduction in working capital was due to falling commodities prices: the company needs less capital to finance a given shipment when prices are lower.

So profits wouldn’t be as adversely affected. Prices aside, the reduction in working capital was perhaps closer to $1.6 billion, theoretically cutting about $200 million from operating profit.

In dire straits, however, Glencore argues there is marginally profitable business it can cut.
Effectively, there are diminishing returns to its trading capital: the final billion invested earns a much lower return than the first.

Glencore seems likely to cut working capital more to protect its credit rating. Finance chief Steven Kalmin said it could reduce the company’s first-half net working capital of about $15 billion further, if needed. Some of that would come from operating its mines more efficiently, though the bulk would likely be found in trading.

This could mean foregoing opportunistic trades, such as taking advantage of the shape of the futures curve. The problem with that: Glencore’s vast trading operation is also meant to give it market intelligence and access that rivals lack. Doing some low-margin business may also be needed to maintain key relationships.

One option would be to do more brokerage-style business, taking a handling fee for marketing commodities, rather than taking risk on its own balance sheet. Another possibility is to team up with banks or other financiers to share the costs of potentially lucrative trades.

All of this involves trade-offs that come at a cost. But Glencore at least has a trade to make.

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