Welcome to “The most powerful companies you’ve never heard of” – an ongoing series from The Conversation that sheds light on big companies with low profiles.
Today, The University of Western Australia’s Richard Heaney examines global resources company Glencore.
Swiss-based mining and commodities trading powerhouse Glencore International managed to keep a surprisingly low public profile in the decades after it was founded in 1974.
This all changed in May, when the company went public in the biggest listing in the history of the London Stock Exchange.
The $US11 billion initial public offering not only made billionaires out of several Glencore executives, including chief executive Ivan Glasenberg, but also drew attention to a number of controversies in the company’s past.
These include allegations of the company ignoring UN embargoes on “rogue states”, such as Saddam Hussein-era Iraq, and claims that the company’s vast commodity interests have played a role in inflating global food prices.
Glencore describes itself as “a leading integrated commodities producer and marketer". It’s website says: “We produce, source, process, refine, transport, store, finance and supply commodities needed by industries around the world”.
While it is based in Baar, Switzerland, Glencore’s business activities span the world. Its operations include the production and supply of metals and minerals, energy products and agricultural products as well as including a range of industries (motor vehicle manufacture, crude oil processors, power generators, steel producers and food processors).
Glencore’s management system is vertically integrated, which means that it operates subsidiary companies along various levels of the supply chain. But it also trades with third-party companies where necessary. In fact, it prides itself on providing supply chain services to producers and consumers of commodities. There are over 2,700 employees in the marketing division and more than 54,800 employees either directly or indirectly employed in industrial operations.
The company has a diversified management structure, with three major business segments: metals and minerals (zinc, copper, lead, alumina, aluminium, ferroalloys, nickel, cobalt, iron ore); energy products (oil, gas, coal, coke); and agricultural products (grains, oils, oilseeds, cotton, sugar).
These segments are broken up into commodity departments, which are responsible for managing production, marketing, sourcing, hedging, logistics and investment activities for their commodities.
Each of the commodity department senior managers is viewed as part of the executive team. This focus on devolved management responsibilities is also reflected in Glencore’s recruitment policies, where it states that it looks for “people who think and act like entrepreneurs, are willing to learn, are passionate about their work and strive to be leaders in their field.”
Glencore’s financial statements show turnover for the year ended 31 December 2010 of $US145.0 billion, total assets of $US79.8 billion.
It’s market capitalisation – the total value of its shares – on the London Stock Exchange is about $US24.9 billion.
The return on equity for the year ended 2010 was 18% and the return on invested capital was 10%.
Performance is well up on 2008 and 2009 though it is also well down on that reported for 2007.
Glencore’s profitability has improved over the last year or so, but there are some worrying trends with the recent growth in borrowings.
Its total borrowings-to-assets ratio was 38% at the end of 2010, up from 36% for 2009, 30% for 2008 and 34% for 2007.
The problem with the 30% increase in borrowings over the year 2010 is that much of this has been used to fund a $US4.5 billion increase in working capital – money put aside to run the business including accounts receiveable and inventories – and a $600 million increase in cash, marketable securities and cash equivalents.
If the company cannot clear the stock and manage its accounts receivable collection, it could be facing cash flow problems in the near future.
Glencore has a credit rating of BBB (stable) and Baa2 (stable) from Standard & Poor’s and Moody’s respectively, and this appears reasonable given the level its of borrowings and the nature of the underlying business.
The float of Glencore may well create a billionaires factory, but the same company has been accused of paying its traders poorly. In one case, oil traders in the London office saw their salaries fall by 36% in 2011.
Glencore’s remuneration contracts include a small fixed-wage component and large bonus component, so the reduced bonuses reflected the poor performance of the London based department that deals with oil.
This is entirely consistent with the firm’s compensation policy. It is rare to see a firm cut wages in this way, though it is not surprising with Glencore, which is so focused on performance.
Glencore is also looking to cut its oil tanker fleet due to low shipping rates. While the oil section of the company is not doing well, it is clear that the return on equity is being generated by other sections of the business.
There has also been some comment on the safety record of the company, with 18 worker deaths recorded in 2010 – rate is considerably higher than that recorded for either BHP or Rio Tinto.
Glencore is clearly a large player in world commodity markets, and it will be interesting to see whether the performance of firm changes now that it has listed.
It has shown that it is prepared to act quickly to cut losses in the oil sector, though a quick analysis of recent annual reports suggest that there may be a need to act more comprehensively if world markets continue to slow.
Its high levels of borrowing and growing stocks and receivables could spell trouble in the near future.
Is there a big company with a low profile that you think more people should know about? If so, email the editor.