Where Glencore is going, other international commodities traders are almost certain to follow.
The Swiss-based metals, oil and grains dealer, which launched an initial public offering (IPO) valued at up to $12.1 billion on Thursday (all figures US$), is likely to have the field clear while it taps investor appetite for profits from the world’s natural resources.
But over the next few years, several of its rivals will probably also come to the market as they mature, seeking a permanent source of capital and boosting their ability to acquire assets and make their partners even wealthier.
“Glencore is a good indication of why companies eventually decide to do an IPO,” said Henri Alexaline, a senior credit analyst at BNP Paribas. “As you grow and get ever more successful, your ability to sustain yourself within the private environment becomes more and more difficult.”
The giant commodities trader, which will list in London and Hong Kong in what could be a record debut, has confirmed it will sell a stake of between 15 and 20 per cent.
The IPO values Glencore at up to $60 billion and marks the end of four decades of closely guarded privacy.
Glencore’s business model has been highly successful since its launch in the 1970s. Its hundreds of partners have reaped huge profits trading the raw materials that China, India and the rest of the world need to grow.
Glencore was for years strongly committed to its partnership structure, which made a 2010 net profit of $3.8 billion on sales of $145 billion, and many rivals have vowed to stay private.
Commodity traders Trafigura, Gunvor and Mercuria have all said recently they will not go public and that private ownership helps motivate staff and offers flexibility.
“We intend to remain private, and I think it is very important to maintain the link between ownership and the long-term structure of the business,” said Jan-Maarten Mulder, Trafigura’s global head of corporate finance and treasury.
But as commodity traders grow they acquire fixed assets, upstream and downstream infrastructure and valuable commercial contracts that need long-term funding. And bonds and bank loans can be expensive and unreliable.
As they mature, so do their key staff, and companies need to find ways to guarantee continuity through these changes.
“Eventually you have question marks around key people and managing a smooth succession,” said Alexaline.
“The financial crisis has also highlighted that for anyone to rely on banks to fund themselves is not always a great idea, and the more sources of capital you have the better. The commodities industry is facing quite exceptional times. Volatility is high and everyone is scrambling for capital because there is really a lot of money to be made.”
Commodities have traded at record highs this month, with the Reuters-Jefferies CRB index global commodities benchmark up more than eight per cent since the beginning of the year and near its strongest level since September 2008.
However, moving to public funding has its downsides. It takes time, is expensive and requires large amounts of disclosure in an industry that is traditionally secretive.
Bankers’ fees and others costs can absorb 1-2 per cent of an IPO, and a 1,500-page prospectus tells investors and competitors a great deal about a company’s operations.
“The potential advantages of an IPO are well documented,” said Andrew Moorfield, global head of oil and gas at Lloyds banking group. “However, there is one major downside for these entities — disclosure. The private trading houses are exactly that: private.”
Private ownership allows for a much longer-term view and a much stronger tolerance of volatility and the thin margins associated with trading, bankers say.
“Consistent profits always present a good story, but there is a question mark over how comfortable the equity markets (big pension funds, et cetera) would be with large hedging losses if these materialize,” Moorfield said.
Despite the drawbacks, pressure to improve margins by using costly fixed assets can become compelling as firms mature.
“Metals traders especially need infrastructure and long-term funding,” said an analyst at one commodity trader rumoured to have looked at an IPO.
“Others will follow Glencore — but not for a while,” said the analyst, who declined to be identified.
Alexaline agreed: “If you are a successful trading company, become well-established and eventually acquire hard assets, going to an IPO may be a natural progression.”