Moneycontrol
Sep 05, 2012 06:42 PM IST | Source: ft.com

Commodity traders eye distressed assets

The slump in metals prices could turn out to be a blessing in disguise for some of the world's largest commodities houses. The trader-cum-producers are vulture buyers that use periods of stress to snap up assets on the cheap.


The slump in metals prices could turn out to be a blessing in disguise for some of the world's largest commodities houses. The trader-cum-producers are vulture buyers that use periods of stress to snap up assets on the cheap.


True: low commodities prices will hurt them in the short term. First, their profitability of production assets declines; second, weaker prices reduce the profits of trading. Yet, a weak market does provide a hidden opportunity.


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Glencore is one of the traders that could profit, and others, including Vitol and Gunvor in energy, are already moving to snap up distressed assets cheaply. Thus, the current slump could help traders expand their fixed asset holdings, helping them move away from their reliance on the middleman business model.


Glencore's experience in the global financial crisis in 2008 is telling. Ivan Glasenberg, the 55-year-old South African chief executive, used the sharp drop in copper and other metals prices to purchase stakes in miners running out of cash or struggling to raise finance in the capital market or the banking sector.


The trader's 2008 booty includes some of its most promising assets, such as copper and cobalt mines like Katanga in the Democratic Republic of Congo. Now Glencore is once again circling assets in trouble. For example, the trader is likely to underwrite a right issue by Australian miner Straits Resources. It is also looking at an aluminium smelter in trouble in Italy owned by Alcoa.


If the $70bn merger between Glencore and Xstrata fails later this week, expect the trader to concentrate in the next few months on acquiring medium and small-sized miners in financial trouble, rather than targeting global miners such as, say, Anglo American and Freeport-McMoRan.


Other commodities traders have already captured several prey as the market weakens. Swiss-based Vitol and Gunvor have used the crisis in the oil refining sector earlier this year to buy several large refineries previously owned by Petroplus, the bankrupt Swiss-based refiner, at minimal values.


The trend is set to gain pace if commodities prices remain weak because slow economic growth in China and the capital market remains firmly shut. If the financial pain is high enough, some natural resources companies could end up knocking at the door of the commodities trading house for help. If so, the traders could emerge from the current slump with a good collection of assets.

The Commodities Note is a daily online commentary on the industry from the Financial Times.

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