Wider global issues epitomised in the problems of one company.....

Tuesday 29th September 2015

Wider global issues epitomised in the problems of one company.....

Ref : "Glencore shares routed as fears grow over commodities prices" , The Financial Times, p.1

Regulars will know that it's not our way to discuss individual companies and certainly not to speculate on what the future may hold for them. We refer to Glencore today only because blanket media coverage makes it almost impossible not to do so, but more importantly because its problems and collapsing share price reflect much wider threats facing the global economy, and how many of them are interconnected (of course).

Glencore is a huge conglomerate that both mines and trades a wide range of commodities including those most heavily used in industry such as iron ore, coal, copper etc. As such, its fortunes have been inextricably linked to those of China. The drop-off in demand brought about by the Chinese economic slowdown naturally leads to downward pressure on commodity prices and therefore severe problems for not only individual companies but more crucially (from a global standpoint) for the countries in which these resources are found  --  think Australia, Canada etc and a whole host of Emerging Markets edging closer to the brink.

Falling commodity prices foster disinflationary forces that are keeping developed nations from being able to raise interest rates. The near-zero interest rate environment that we have seen for so long encouraged a borrowing binge from companies eager to cash in on the good times but now means they are saddled with huge debt burdens at a time of rapidly declining revenues (Glencore for example has debts of approximately $30bn).

Many would argue that global debt levels constitute the biggest threat to the global system, and it's hard to disagree, but even central bankers are split as to what to do about it. Some would argue that a rise in rates, whilst desirable on many levels, would devastate both markets and emerging nations and their currencies. Others say that a period of turmoil is a worthwhile price to pay for a more "normalised" (i.e. higher) rate structure.

So, there you have it .... most of the world's major economic issues represented in the fortunes of one company. One might sum it up with a very crude flowchart (of sorts !) :

GLOBAL CRISIS leads to ULTRA-LOW RATES ........ CHINA BOOM leads to HUGE CORPRATE BORROWING for investment at ultra-low rates ........ CHINA SLOWDOWN leads to FALLING COMMODITY PRICES and DECLINING REVENUES ........ FALLING COMMODITY PRICES leads to DISINFLATION ......... which leads to DOWNWARD PRESSURE on INTEREST RATES ........ WHITHER INTEREST RATES NOW, with half the world up to its eyes in debt but the US showing relatively healthy growth and a desire to return to a more normalised rate structure ?

ADDENDUM : Large adverse market moves are often blamed by corporate officers and central bankers alike on the activities of speculators, who in the case of Glencore may have been "short-selling", either as an outright directional bet (i.e. lower) or as a hedge ..... it's suggested that hedge funds may have been selling Glencore shares as an insurance against falling copper prices for example, as the two might be expected to move in tandem. Whilst it's undoubtedly true that such activities do exaggerate market moves and are often unwelcome, it's the price one sometimes has to pay for a "free market", and few would advocate any heavy-handed measures to outlaw such practices (as we have seen in China recently).