Reference no: EM133033783

High stakes in Glencore's trading activities 

Glencore, the global mining and trading company, has an eventful history of seizing opportunities in places where the risks are high, but so are the potential rewards. Its roots go back to 1974. Originally, the company was Marc Rich & Co, a private company founded by Marc Rich, known as the 'godfather' of modern commodity trading. Traditionally, the large trading fi rms are closely run and secretive. Rich was controversial, in that he traded with regimes such as the apartheid regime in South Africa, Libya during its military dictatorship, and Iran, in breach of a US embargo. Pursued by the US Justice Department, he was indicted in 1983, on 65 criminal counts for tax evasion, racketeering and trading with an enemy country. He was on the FBI's wanted list and became a fugitive from US justice, fleeing to Switzerland, where he carried on the business. Ivan Glasenberg, another trader, joined the fi rm in 1984. In 1994, Glasenberg and other senior traders led a buyout of the business from Rich, who from then onwards played no role in the fi rm. In 2001, Rich was pardoned by President Clinton. The fi rm remained based in Switzerland, and was renamed Glencore. Glasenberg became its CEO in 2002. He is known as a competitive, round-the-clock trader who always plays to win.

Opportunities opened up with the growth in commodities trading in the 2000s, bringing unprecedented profi ts to the world's large trading companies, in many cases outshining the fi nancial performance of the Wall Street banks such as Goldman Sachs. The trading companies were operating in volatile environments, often in developing countries where governance was problematic, political risks were high and much business took place through shadowy individual go-betweens. Such dealings can be tinged with corruption, as well as money laundering. They can be targeted by regulators, as Rich had learnt. After 37 years as a private company, Glencore went public in 2011, listing in London. The London debut promised to make the six traders at its heart all billionaires. As a PLC, Glencore, valued at £39 billion, would attract greater scrutiny by regulators henceforth, and would be subjected to greater public disclosure requirements.

The commodities boom had lifted mining companies as well as traders, and Glencore eyed the miner, Xstrata, as a takeover target. The takeover of Xstrata would cost $30 billion, but by the time it was completed, in 2013, the slowdown in global demand for commodities was already evident. Xstrata, moreover, had borrowed heavily to fund investment projects aimed at boosting mine production, and was saddled with debt of $15 billion, which Glencore inherited. Glencore had envisaged that trading activities would be consistent performers financially, compensating for the fluctuations in fortune that affect mining operations. After the takeover, however, the company found itself heavily dependent on mining, and also carrying a worrying level of debt. The timing of the Xstrata takeover was unfortunate, and critics have said that Mr. Glasenberg and his fellow traders probably made a strategic mistake in purchasing Xstrata (Hume, Wilson and Sheppard, 2015). However, Glencore's business model had evolved to encompass both mining and trading.

In recent years, Mr. Glasenberg has been involved in a number of deals that have attracted notice from US regulators. One was a deal in 2016 with the Qatar Investment Authority to buy a 20% stake in Rosneft, the Russian oil company under sanctions over Russia's incursions in Ukraine. However, Glencore's activities in the Democratic Republic of Congo (DRC) have attracted greater attention. These activities involve ties with an Israeli businessman, Dan Gertler, who is on a US sanctions list for corrupt mining deals in the DRC. The DRC's vast mineral resources are a source of immense potential wealth, but the country is beset by weak governance, and rival armed groups contest control of different areas of the country, endangering the lives and livelihoods of ordinary people. A health crisis caused by the ebola virus has been worsened by the conflicts. Humanitarian groups are struggling to control the spread of disease in the conflict zones.

Glencore operates copper and cobalt mining in the DRC, which contains half the world's reserves of cobalt, a resource necessary for the production of electric car batteries. In addition to Glencore's diffi culties in operating in this insecure environment, its dealings with Mr Gertler have attracted the attention of the US Treasury and also the Department of Justice, which started investigations into bribery and corruption. Such investigations could run for years, and would blight Glencore's share price for the duration. The potential crimes fall under moneylaundering statutes and the Foreign Corrupt Practices Act (FCPA). Some of the relevant evidence emerged from revelations in the Paradise Papers in 2017. These were the result of research by investigative journalists, and shone a light on off shore financial dealings (see Chapter 6). The Serious Fraud Office in London is also investigating the company. How will these investigations affect the company's business model? It is possible that Glencore will withdraw from its risky trading activities, and concentrate more on its mining businesses. However, mining activities, especially in conflict zones, are themselves highly risky. For Glencore, the risk-taking inclination of its owners, especially Mr. Glasenberg, is part of its culture.

• Why is Glencore particularly in the firing line in terms of scrutiny by regulators?
• Should global traders be subject to international, rather than national, regulation? Explain.