Jim Armitage: Things are far from well at misshapen giant GlencoreComments Off on Jim Armitage: Things are far from well at misshapen giant Glencore
Read some of the big banks’ research notes on Glencore today and you’d be forgiven for thinking all was well.
“Not a bad set of numbers”, one of them says, “year-on-year improvements in cost targets”, “balance sheet better than expected”, “net debt of $29.5bn a positive” others chime in.
But all is far from well at this misshapen giant.
Tinkering with costs is not enough for a business whose shares have collapsed by 41% this year.
The balance sheet remains terrifying: net debt at nearly $30 billion is far from positive.
Yes, as the City analysts champion, that debt pile has fallen by $1 billion and, yes, that is better than most had expected.
But as a proportion of Glencore’s plunging underlying profits, it has actually increased by 13%.
Credit rating agencies don’t like that kind of trend. To them, it looks like a big wooden box marked TNT with a fizzling cord dangling out of the side.
Ah, the analysts say, but don’t worry. Glencore can simply cut the debt by turning its trading operations down a notch, reducing the amount of cash it needs to buy the ship loads of copper and grain it trades around the world.
But that is to miss the fact that trading, although savagely down in profit terms, makes up more than a quarter of Glencore’s earnings now that mining is on its knees and will form the basis of any profit improvement in the second half of the year.
Furthermore, if you believe Ivan Glasenberg’s business model, the trading arm of Glencore — with its high-level contacts among buyers, sellers and governments around the world — is crucial to that fabled insight into future commodities prices.
At least, that’s what he told us at the time of the flotation, shortly before Mick Davis got him to pay a 13% premium for Xstrata just before commodities collapsed.
Anyway, with a few notable exceptions, you will not hear too much about that from the bankers and brokers today.
Could that have anything to do with Glasenberg’s canny move back in 2011 to get 23 of them on the payroll for the float?
Good to see outgoing MPC member David Miles calmly deflating a somewhat dramatic Newsnight explanation of price bubbles in the bond market.
Yes, he said, interest rates will rise soon but in tiny increments to a “new normal” level some way below the pre-crash averages of around 5%.
The increases should be slow enough to deflate asset bubbles gently with relatively little pain.
Furthermore, we should embrace these tiny increases in rates as a welcome sign that our economy is on the mend. In other words: don’t panic.