Glencore chief executive Ivan Glasenberg clearly doesn’t want to be accused of doing too little, too late in response to the commodities crash. In September, he announced a series of drastic measures to cut net debt by a staggering $10.2bn (£6.6bn) by the end of 2016. Today, he revealed Glencore will be half way there - by the end of December.
The firm’s new net debt target for the end of the year is a trifling $25bn, down from the $29.6bn on its books in June. It’s already raised $2.5bn through an equity issue and is on track to save another $2.4bn by suspending the full year and interim dividends.
Glencore has added to that with the first of two ‘streaming’ agreements, a selling future precious metal output in exchange for a lump sum. It’s a smart idea for a debt ridden firm with too much capacity. The deal it announced today with Canadian firm Silver Wheaton (guess which precious metal it’s after) will bring in a cool $900m.
Alongside its other belt-tightening measures – notably reducing capital expenditure and selling a stake in its agriculture business and a couple of copper mines – it’s easy to see how all this could take a hefty chunk out of Glencore’s colossal debt mountain. Indeed, the firm’s already paid back $2bn and repurchased $400m in bonds since September.
But will it be enough? Even if its first reduction drive works, it still leaves a staggering amount of debt. Besides, the initial measures surely plucked the low hanging fruit. There are only so many times you can suspend the dividend without the share price tanking (well, more than it already has...), while raising further equity in such conditions would be equally difficult.
That just leaves asset sales. But Glasenberg doesn’t really want to sell the company’s silver (as it were). He believes that commodity prices will inevitably rebound and wants to be in a position to exploit it when it does. So, he just has to do enough to keep Glencore’s investment grade credit rating until the winds turn in his favour.
Except what if they don’t? What if China’s downturn, the source of commodity producers’ woes, is actually the beginning of a fundamental shift away from heavy industry and construction, rather than a blip? Given how long it takes for the industry to adapt to shifting demand through its investments, that would mean current global overcapacity and depressed prices could persist for years.
Indeed, it’s a worrying sign that Glencore’s efforts to increase the zinc price by slashing its production by a third, or 4% of global supply, have failed to have the desired effect as competitors simply took up the slack. Zinc is now back down to $1,653 a tonne, after spiking to over $1,800 following Glencore’s production cut announcement. Between late 2009 and mid this year, the average was more like $2,000.
One ray of hope is Glencore’s ‘marketing’, or metals trading, division. It was always supposed to cover the firm during hard times with a steady stream of profit, but appeared to be in trouble earlier this year. Glencore keeps a lid on exactly how much it rakes in, but shared the good news today that it was maintaining its $2.5-6bn guidance for the division’s earnings before interest and tax.
Pleased by the progress, Glencore’s jittery investors sent the share price up 6.8% to 127.5p this morning. But given its recent volatility -made worse by takeover rumours - that’s not saying much.