Glencore: An outlook for the world’s largest commodity producer

Rajinder Dhesi

This week the commodities giant Glencore announced pre-tax earnings of $14.7 billion for 2017, a 44% rise compared to the previous twelve-month period. Its share price has subsequently risen by up 22% to 399.3 pence (21st February 2018). There are several reasons for this strong performance. First, and perhaps most significantly, the renewable energy metal triad of copper, cobalt and nickel have seen incredible price growth over the last year. The price of cobalt soared by 130% from $32,000 to $75,000 on the London Metal Exchange last year, owing to a rising demand, primarily from electric vehicle (EV) manufacturers (each EV uses approximately 8 kg of cobalt per lithium-ion battery). Around two-thirds of the world’s cobalt production occurs in the Democratic Republic of Congo, a country in which Glencore operate almost as a monopoly; their only rivals being small-scale, independent mines who sell on to larger processors including Glencore. As a result, numerous automobile manufacturers, including Tesla and Volkswagen have been in talks with Glencore to secure supply of cobalt.

Supplementing this is Apple’s announcements last week that they are looking to secure several thousand tonnes of cobalt directly from miners to be used in the supply chain producing Apple products. Glencore are likely to be a large beneficiary of Apple’s investment, given that the technology giant requires both a vast supply of cobalt, as well as an ethical supply chain – the operations of smaller mines would be far harder for Apple to observe and manage.

Away from the renewable energy boom, there are other reasons for Glencore’s bullish forecast. Glencore have stuck with their coal portfolio – an industry which major competitors such as Rio Tinto have divested from. Thus, in the short term, Glencore have benefited from a 30% rise in the price of coal over 2017. The other arm of Glencore’s operations, trading, has also experienced remarkable growth, with pre-tax earnings up to $3 billion, the largest sum since before the financial crisis.

Hints at Glencore’s future plans also evoke optimism. Large earnings have produced the company’s highest ever free cash flow of $2.3 billion. Simultaneously, this has allowed a repayment of the company’s debts, higher dividend payments to shareholders and a number of possible acquisition opportunities for Glencore. Most notably, Glencore are looking to expand their operations into agriculture through the acquisition of Bunge Ltd., a grain merchant trading on the NYSE.

However, analysts still warn of uncertainties for Glencore. Proposed new laws will have the potential to reduce Glencore’s earnings through taxes, though the extent to which this will have an impact is unknown. Adding to this, current research into lithium-ion batteries has the possibility of wiping out the need for any cobalt. This is certainly being incentivised by the recent drastic cobalt price increases.

Despite some levels of uncertainty, Glencore have a strong foundation based on renewed future growth given the surge of interest in EVs, as well as the company’s own strategy of reducing debt and diversifying through acquisition. This makes Glencore a good company to buy shares in for investors.

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