Glencore CEO Cuts Zinc in Battle With Funds Distorting Prices
October 9, 2015 — 7:28 AM HKT
Updated on October 10, 2015 — 7:01 AM HKT
Company to suspend operations at mines in Australia and Peru
Zinc price surges 12% in biggest gain since at least 1989
Glencore Plc billionaire Chief Executive Officer Ivan Glasenberg has declared war on the hedge funds he says are distorting commodity prices and intensifying a price slump.
The outspoken mining industry figure on Friday announced a plan to cut zinc production by a third in a bid to stoke a rebound in the metal that’s trading near a five-year low. It worked: zinc surged by the most since at least 1989, leading advances for all metals.
The company’s stock also gained, extending a rebound to more than double from last week’s record low. The move came days after Glasenberg told a conference in London that commodity prices don’t reflect supply and demand and followed similar cuts to copper and coal production. He’s navigating a collapse in raw materials that’s wiped $37 billion from the miner and trader’s market value this year.
“Glencore is showing industry discipline by cutting unprofitable tons and saying it is worth more value to leave the tons in the ground,” Heath Jansen, a Citigroup Inc. analyst, wrote in a report Friday. “We expect assets to remain out of production until zinc prices improve materially and stay higher.”
The Swiss company is restructuring its finances and operations as it seeks to allay investor concern it carries too much debt. As one of the world’s biggest suppliers of base metals such as copper, nickel and zinc, Glencore’s metals and minerals businesses delivered about 30 percent of its revenue last year.
“It’s clear that there’s distortions,” Glasenberg said Monday. “How big they are we don’t know, but eventually the fundamentals will prevail. The funds are playing various commodities on the derivatives side. Eventually the physical will drive the actual commodity price.”
The move is unlikely to affect analysts’ earnings estimates for the company or cash-flow forecasts as the operations are unprofitable at current prices, according to Citigroup.
Annual zinc output will fall by about 500,000 metric tons as Glencore suspends or cuts output from mines in Australia, Peru, and Kazakhstan, it said Friday in a statement. Global production was 13.3 million tons in 2014, according to the U.S. Geological Survey, making the reduction equivalent to almost 4 percent of world output.
“Maybe they are the trailblazer, as there’s the specter of oversupply in many commodities,” James Wilson, a Morgans Financial Ltd. analyst, said by phone from Perth. “If you want higher prices for a commodity, you need to create price tension and to have less product in the market. Glencore’s doing that, though maybe under duress, and it’s something that other big companies should be thinking of.”
The curbs will shave about 100,000 tons from its fourth-quarter output, Glencore said, while production of other metals including lead and silver will also be affected. Zinc rallied as much as 12 percent to $1,875 a ton on the London Metal Exchange, the highest since Aug. 11. Prior to Glencore’s announcement, it had fallen 23 percent this year.
“The main reason for the reduction is to preserve the value of Glencore’s reserves in the ground at a time of low zinc and lead prices, which do not correctly value the scarce nature of our resources,” the company said. Glencore is “positive about the medium and long-term outlook for zinc, lead and silver prices.”
Glencore climbed 7 percent to close at 129.1 pence in London on Friday. Earlier in the day, the stock surged as much as 16 percent to more than double from the low on Sept. 28, when it plunged by the most since the firm’s initial public offering in 2011.
The shares had slumped after analysts expressed worries over the pace of its $10 billion debt-reduction program. Glencore erased those losses after refuting the concerns and as investors including the sovereign wealth fund of Singapore were said to have expressed interest in a minority stake in its agriculture business.
David Herro, the head of international stocks at Harris Associates LP, one of Glencore’s biggest investors, said Friday that he supports the company’s debt-reduction plan. Herro, who manages the $27 billion Oakmark International Fund, said in August that he was making a long-term investment in Glencore because the business was “substantially undervalued.”
Commodities prices have slid in recent months as producers of metals to energy struggle to curb surpluses due to slower economic expansion in China. The nation accounted for half of the world’s refined zinc consumption in 2014, according to Bloomberg Intelligence. The worst of the collapse in prices is probably over, according to Pacific Investment Management Co., which manages $15 billion in commodity assets.
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.