Glencore – Xstrata: The New Threat to Commodity Stability?

The proposed takeover by Glencore of Xstrata is going to present global commodity buyers with some challenges. The combined group will become a formidable player, creating an entity with a value of $90 billion and profits in excess of $16 billion. The group will become not just the world’s biggest exporter of coal for power plants (1/3 of the world’s seaborne thermal coal), and the largest producer of zinc, but also a significant player in commodities such as copper and nickel. In addition, it will create a powerful position by vertically integrating mining and commodity sales/trading. This will give the merged group significant pricing power, which should be viewed with some concern by commodity buyers going forward.

This merger has already raised concerns for EU steel makers who are considering lodging an antitrust complaint whilst carrying out further investigations. The zinc market is already starting to scare some investors because the combined group will represent 16% (Zinc Ore) and 18% (Zinc Metal) of supply globally. It is likely to account for approximately 60% of zinc trade internationally, and the group could exert greater influence over refined zinc prices (used in galvanizing and strengthening steel).

So, what impact should we expect? Japan has already seen the price of coal increase by some 3% per tonne as imports have grown because of energy issues after the Fukushima accident. This is just the start; they are expecting to pay near-record prices as the year progresses. This issue is likely to grow as demand for coal will increase by some 30% by 2016.

The impact on steel prices is less certain at this stage, but we should consider the fact that as supply falls into the control of fewer hands, prices are only likely to go in one direction.

The impact of the global financial crisis has created many phases of destocking and stocking in supply chains. This bullwhip effect is likely to be further impacted by such a merger as Glencore’s. I suspect we will see the combined group make more acquisitions to further tighten the commodity markets. This will have a knock-on effect with the possibility of many manufacturers looking at vertical integration to secure supplies and/or consolidation to improve bargaining power. Supply chain needs better analysis of the risks to future supply and pricing, which is yet another example of the intelligence required when building sustainable and profitable products for market. Not only do we need to think about current availability, but also the long-term structure of supply chain when creating the products of the future. This will require regular and multiple data feeds from every point in the chain, on down to the raw materials, which will enable procurement to positively affect spending decisions in the future.

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