Glencore shares hit sub-£0.71 as abyss beckons
- Glencore share price loses nearly 25% in London trading
- More than £2 billion wiped off the value of the global commodities trader
- Swiss-based giant already tried to ward off crisis with $2.5bn share placement
- 85% wiped off the value of Glencore stock since start of 2015
- Glencore shares directly affected by global commodities pricing slump
That copper lighting is very striking, but the fall in prices this year is just one reason
why global commodities giant Glencore is facing a huge crisis. Photo: iStock
By Martin O'Rourke
Swiss-based Glencore is engulfed by a crisis that threatens to send the global commodities trader and miner towards a deep, dark abyss from which it may struggle to return.
The approximate 25% plunge in the share price to a record low during the London morning trading session was sparked ostensibly by a note from financial products specialist Investec that had the starkest of warnings for the trading giant that "highly leveraged companies, such as Glencore....[could see] their much diminished earnings absorbed by the obligation to debtholders."
Understated that may be, but the devastation has been huge.
Glencore's share price fell to a record low of £0.7071 at approximately 1030 GMT before gaining some traction in the last hour, north of £0.7500. The share price was at £0.7719 at 1154 GMT.
To put that in context, the commodities oil trader that could seem to do no wrong was trading at more than 500 pence in 2011. It's an astonishing demise.
Glencore's been on a one-way street in London trading this morning.
"Our view last week was that the 100 level represented elevated risk of bankruptcy which we find was out of touch with reality as China is still growing and supply is being cut," says Peter Garnry, head of equities strategy at Saxo Bank.
"However, Investec’s report this morning that the stock could be worthless if commodity prices stay flat from here hit a nerve among investors and the stock has been sold off ever since," he says. "The chart shows the blood that has been spilt in Glencore shares."
It's a similar view from London where Saxo Bank equities trader Adam Seagrave reckons this was a calamity that was waiting to happen. "Glencore’s business model was not stress tested for this kind of move in commodity prices," he says. "The recent restructuring it carried out will need to be revisited if spot prices remain at these levels for much longer."
Glencore earlier this month issued a share placement of $2.5 billion to try and ward off a crisis.
"The commodity market has experienced a perfect storm in terms of a slowdown in demand and the simultaneous growth in supply," says Seagrave. "Assuming a gentle/low recovery of commodity prices through 2016, analysts have begun looking at Glencore’s debt levels as its eats into profit and in turn equity value."
And what a slowdown. Oil has been well-documented of course and it is instructive to note that the share price fall began in earnest around the third quarter of 2014 when it was well in excess of 350 pence and then gathered pace once Opec set sail its supply-and-rule strategy at the now infamous meeting from end-November 2014.
Another crashing commodity that directly impacts Glencore has been copper which has slipped by a third since the autumn of 2014.
Copper has fallen from above $3.20/lb a year ago to around $2.25/lb
Of course, those of you who like to seek out a bargain might be noting that the share price has already climbed back to the £0.7700 level.
But any profit taking should proceed with the utmost caution, warns Garnry.
"If the stock does not rebound significantly all the commodity trader’s banks will begin to require asset sales to recover values backing the $50 billion in debt outstanding," he says. "The minority sale of its agriculture unit is a step in that direction."
Whatever road Glencore takes, it looks like a long hard one back to former glories.
Martin O'Rourke is managing editor at TradingFloor.com