The upcoming Glencore initial public offering represents the single most important watershed event to hit the commodity trade ever. I believe its success or failure will give the best directional indication for oil, coal, copper and other metals for the next five years.
Glencore? I hear you saying you've never heard of it. Born from the Clinton-pardoned Marc Rich trading group, Glencore has done its best to keep itself under the radar. This private commodity trader, based in Switzerland, has rapidly redefined how commodities are being priced globally. Its IPO is destined to raise $11-billion (U.S.) and deliver a market valuation of more than $60-billion to the company. It will make the CEO, Ivan Glasenberg, worth at least $9-billion and each of his partners worth at least $120-million each.
This is heady stuff, but even more important is how Glencore makes its big profits and what that means for commodities - and how to cash in on the trend. Let's do some quick reconnaissance: In the early days of commodity trading, individuals like me roamed the open outcry pits, searching for an advantage from small dislocations of physical hedgers and making a reasonable living from it. These were the relative stone ages of commodities, when telephone lines and fax machines and people conducted trade in small limited arenas.
Slowly, a new groups of better capitalized hedge funds and proprietary desks, mostly from the investment banks, began to maximize their advantages while also growing both the nominal size of the trade and the participants in it almost 30 times. They relied on their deep relationships both with commercial hedgers and institutional and retail investors and the quickest computers and access to new electronic access points.
But Glencore has been finding another way. They've slowly built themselves into a powerhouse by buying assets - miners, refineries, oil assets - and spectacularly concentrating on trading financial instruments around those assets - cash markets, futures and derivatives - to generate their massive returns. This is a company without apologia - its website proudly proclaims it as a trading company, not a miner nor refiner. Few financial documents from the private company have been made available in the past and its IPO prospectus is a 1,600-page phantom of misdirection, yet it is clear that almost 90 per cent of Glencore's profits are from trading.
This is how it's done, folks - and how it's going to be done going forward. The Glencore model, followed by similarly unknown private companies Vitol and Trifigura, to name just two, is designed to use capital to acquire physical assets that best augment trading, and that's precisely what this IPO is intended to provide. It is an 180-degree reversal of how commodity markets were originally designed to operate.
The success of this formula for making money in commodities is about to be measured by this IPO. Is it a Goldman-Sachs-like replay of 1999, the start to a new age in money-making opportunity for investment banks? Or a Blackstone 2007 debacle marking the top of the private equity market? Is this the dip to buy in the global commodity trade, or is this latest correction the beginning of a long-term selloff?
Indications are strongly for the former. Despite deciding to offer in the secondary London and Hong Kong markets and restricting investment to institutional $100-million-plus funds and sovereign wealth funds, the IPO is already more than 100 per cent oversubscribed. Even in the midst of last week's huge commodity downturn, the IPO today was priced at £5.30, or $8.56 (U.S.) per share (near the middle of the proposed range, according to Bloomberg).
Watch the price action as it premiers in the public markets. It could tell the future of the commodity trade.
Dan Dicker is a senior contributor to TheStreet and has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser.
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