COMMODITY KING
Aggressive Swiss Giant
Rides Resources Boom
Successor to Marc Rich,
Glencore Gains Power
As Trader, Producer Too
By ANN DAVIS
July 31, 2007; Page A1
BAAR, Switzerland — When the fugitive commodities dealer Marc Rich sold his trading firm 13 years ago, it was best known for doing business with pariah nations.
Since he left, the intensely private company — renamed Glencore International AG — has leveraged itself into an industrial colossus, with a stronger grip over more individual markets for the earth’s riches than almost any other single company.
TRADE SECRETS
• Background: Closely held Glencore, successor to Marc Rich trading firm, is a leading dealer in many commodities.
• Getting More Corporate: Glencore has publicly traded debt and owns large chunks of publicly held producers such as Switzerland’s Xstrata PLC.
• Bottom Line: In commodities boom, little-known giant plays an influential role, including helping to spur recent consolidation in the metals industry.
Glencore is one of the world’s largest suppliers of aluminum, nickel, zinc and lead. It is a major seller of oil, grains and sugar as well. Along with its affiliates, Glencore says, it ships more coal on the high seas than any other competitor.
Glencore also has played a behind-the-scenes role in the recent extensive consolidation of the commodities industry. The takeover battle for Canada’s aluminum leader, Alcan Inc., arose after Glencore combined assets with Russian companies to create a giant that knocked Alcoa Inc. off its perch as the largest producer. In a bruising fight over nickel, Glencore helped an affiliate win a lengthy, multisided battle for Canadian miner Falconbridge Ltd.
The story of Glencore’s evolution from rogue trader to one of the most powerful private companies in the world was pieced together from interviews with people with intimate knowledge of the company and from documents such as bond prospectuses. The firm has long been willing to deal in virtually any commodity around the globe, from cobalt in war-ravaged Congo to crude oil from Saddam Hussein’s Iraq. Its longstanding knowledge and connections in isolated or unstable regimes sometimes give Glencore access to resources at good prices because it can tap opportunities that not everyone is going after. Glencore has said its policy is to require its companies and their employees to comply with any economic sanctions in force in countries where they do business.
Its trading prowess and a drive to acquire production assets like mines and smelters have made Glencore one of the biggest winners in the commodities boom. Its revenue last year was $116.5 billion, besting by about 30% the largest private company in the U.S., Koch Industries Inc. Glencore’s profits of $5.3 billion were more than triple the fiscal ‘06 net of the far-better-known private commodity merchant Cargill Inc.
WHERE IS MARC RICH TODAY?
![[Video]](http://online.wsj.com/public/resources/images/it_videoclip09142004171604.gif)
Watch a video in which Mr. Rich accepts an honorary degree awarded to him in Israel, posted on his firm’s Web site.
A small number of people share these riches. The top 12 Glencore executives saw the value of their stakes in the employee-owned company soar an average of $87 million each last year — more than three times the stock-related pay of Goldman Sachs Group’s chief executive. And the top 67 people at Glencore reaped other pay and benefits averaging $8 million.
As Glencore moves more into the corporate mainstream — floating billions of dollars worth of publicly traded debt — the company still struggles to convince some skeptics it’s a different animal from the firm Mr. Rich founded and left long ago. Not helping is a 2005 report from a United Nations investigative committee saying Glencore paid millions of dollars in kickbacks earlier this decade to gain access to Saddam Hussein’s petroleum under the oil-for-food program. Glencore told the U.N. it didn’t sanction any bribes.
The evolution of the Swiss company owes much to its chief executive, Ivan Glasenberg, 50 years old, a skilled coal trader and onetime South African race-walking champion. He operates from the home offices in Baar, in a low-tax Swiss canton, to which employees from around Zurich travel in purple vans bearing a logo in gold letters swimming in black oil. The firm’s white-and-glass headquarters contrast with some old-world touches: receptionists in immaculate suits, fine china to serve guests lunch, and tingling cowbells in Alpine pastures outside.
One of Mr. Glasenberg’s moves has been to package production assets the trading firm owns into affiliated publicly traded companies, much of whose output Glencore then markets. The result is to amplify its market power. Glencore moves so much metal that it at times holds 50% to 90% of the nickel and aluminum scheduled for delivery in London Metal Exchange warehouses, according to traders who know who holds positions on the exchange.
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Such aggressive moves aren’t illegal: Commodities markets allow producers considerable trading leeway to manage their price risks. Glencore has been able to counter occasional probes into suspected market manipulation, such as in the aluminum market, by arguing that its production operations led it to do what seemed like heavy buying or selling.
“There is no other company like Glencore that plays in so many fields. In these markets, suppliers are in the driver’s seat,” says Markus Moll, a metals industry analyst in Austria who advises specialty steelmakers.
Glencore’s history traces to 1974, when Mr. Rich founded a trading firm of his own after a fractious departure from Philipp Brothers, a storied metals and oil trader. In 1983 the U.S. Justice Department charged Mr. Rich with tax evasion and with buying oil from Iran while it held U.S. hostages. He fled to Switzerland, where his firm was based. It and its former U.S. unit later pleaded guilty to some of the charges and agreed to a nearly $200 million settlement, but Mr. Rich remained a fugitive.
His status hung over Marc Rich & Co. AG until 1994, when some of Mr. Rich’s lieutenants bought him out for about $500 million and the firm took the name Glencore. They raised the money partly by selling a 15% stake to a pension fund of Swiss pharmaceutical giant Roche Holding AG, several former partners say. Roche says it doesn’t comment on investments. Glencore bought back the interest a few years ago. As for Mr. Rich, he set up other trading firms bearing his name, some of which he still owns. President Clinton pardoned him upon leaving office in 2001.
At the time of the buyout, Mr. Glasenberg was among the trading firm’s rising stars. He had gained a reputation as a relentless negotiator who, among other things, was able to find buyers for coal from his native South Africa when it was widely boycotted because of its apartheid racial policy.
Glencore has a network of some 50 outposts in more than 40 countries, manned by field officers. Among their roles is to meet with commodity suppliers and consumers, trying to gauge inventory levels and estimate local demand. The network has sometimes drawn comparisons to the Central Intelligence Agency. Beyond gathering information, the job may involve practical chores like imploring civil servants for an industrial permit or even going down to the docks to yell at longshoremen so a shipment of metal or grain gets out of port, veterans of the system say.
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Employees in the “traffic” department work with these agents — chartering vessels and sometimes diverting them to more valuable assignments. Both field officers and the traffic crew are alert for signs of local shortages or oversupplies, information that gives Glencore traders an advantage.
Traders are the stars around which the system revolves. The common trader image is of a person glued to a computer screen making rapid-fire bets on futures. But Glencore’s traders are frequently on the road. They focus on matters like whether coal can be delivered more cheaply by shipping it from one location than from another, or whether the firm could sell a refined metal more profitably if it owned the raw ore instead.
When Mr. Glasenberg was running the coal division in the 1990s, he determined that rather than just trade coal, the firm should buy coal mines. Depressed coal prices made mines easy to buy. Mr. Glasenberg persuaded his partners to spend a couple of hundred million dollars to acquire mines in Australia and South Africa. He told the engineers running them to focus on costs and production and leave the selling to him. He then set the firm’s ferocious marketing machine to work.
Mr. Glasenberg became chief executive in 2002. That year, amid another beaten-down commodities market, Glencore folded its coal mines into a small producer of zinc and alloys that it partly owned. This company, Xstrata PLC, agreed to buy the coal assets for $2.5 billion and simultaneously listed its shares on the London Stock Exchange. Glencore’s chairman, Willy Strothotte, is also chairman of Xstrata.
That company then went on an acquisitive tear, quickly becoming the world’s fifth-largest mining company. Xstrata’s soaring stock has hoisted the value of Glencore’s 35% stake in it to $21 billion.
Xstrata is just the most visible of Glencore’s public affiliates. Beginning in 1987, Glencore bought interests in several aluminum-production plants. In 1996 it combined some of them into Century Aluminum Co., which it floated on the Nasdaq Stock Market. Century now is North America’s third-largest aluminum producer. Glencore, which owns 29% of it, sells it raw materials and buys part of its aluminum output.
In such deals, when the affiliated companies later acquire more assets, Glencore’s command of the market often rises as well. One Glencore customer, Max Crosland, head of fuels and logistics at a British coal-fired power station, says he buys from the company partly because he knows Glencore has deep access to supply. “The more confident we are in our coal supplier, the less inventory we can hold,” he says.
Glencore also gets fees for its marketing efforts. At Xstrata, Glencore takes a cut of 3.5% to 5% of most sales of ferrochrome and vanadium, a metal used to strengthen steel. Glencore gets 50 cents for every ton of South African and Australian coal Xstrata exports, in exchange for its advice and market intelligence. In nickel, Glencore shares profits when it gets Xstrata prices above a certain level.
The Glencore-Xstrata relationship has stirred concerns about their collective market clout, particularly in thinly traded markets where there aren’t transparent futures exchanges. For instance, in 2002, bond filings show, Xstrata controlled 24% of the market for vanadium and Glencore was Xstrata’s exclusive marketer of the metal. With Glencore’s early input, Xstrata had launched a vanadium mine in Western Australia.
Soon after the costly mine opened, a vanadium surplus led to rock-bottom prices. This was bad both for Glencore, which had agreed to buy some of Xstrata’s production elsewhere at prices that were now too high, and for Xstrata, which had sunk money into a money-losing mine with operational problems.
Xstrata halted the mine’s production in early 2003 and permanently shut it in 2004. It dismantled the equipment, making the mine hard to restart, and it closed another vanadium mine elsewhere as well. With all this production taken out, the metal’s price soared — quintupling by the end of 2004, according to price provider Ryan’s Notes.
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Western Australia officials, incensed at the mothballing of a mine that taxpayer funds had helped develop, launched an investigation. A disgruntled local partner on the mine project told the investigators that Glencore was sitting on a stockpile of vanadium and had a motive to push the price up.
Xstrata told the officials no one could manipulate the price of vanadium because some of the metal always gets produced regardless of demand, as it’s a byproduct of steelmaking. Xstrata argues that it wouldn’t have abandoned a mine costing hundreds of millions of dollars to help Glencore reverse far smaller losses. It also notes that a corruption probe later revealed that its disgruntled mine partner had helped script the eventual investigative report. That report said Xstrata’s actions were a factor in higher prices but it didn’t allege market manipulation.
Glencore is known for overcoming obstacles to delivery. Last year it was able to get coal to Israel despite problems gumming up shipments from Russia. “They will always find a way,” says Moshe Bornstein, head of Israel’s National Coal Supply Corp.
One of Glencore’s most far-reaching moves was in aluminum. In 2004 it won an auction for Jamaican properties that mine and refine bauxite, a raw material for aluminum, that were also coveted by a company controlled by Russian oligarch Oleg Deripaska. Over two years, as Mr. Deripaska and another Russian aluminum producer discussed a combination, Mr. Glasenberg offered to link up with them by contributing the Jamaican assets and some others to a joint enterprise.
The result was the formation this year of the aluminum giant known as United Co. Rusal, of which Glencore owns 12%. After the deal closed, Alcoa, which had been the largest producer of primary aluminum, tried to keep up by acquiring Alcan, only to be outbid by the Anglo-Australian Rio Tinto.
Glencore’s relationship with the well-connected Mr. Deripaska may serve it well. One of his companies is poised to take control of a Russian oil producer from a businessman who fell out of favor with the Kremlin. Glencore has managed to keep its large stake in many of that Russian oil producer’s assets, people familiar with the deal say.
Distancing itself from its Marc Rich past has been a challenge for Glencore at times. The 2005 U.N. report on Iraq oil-for-food abuses accused Glencore and a firm then controlled by Mr. Rich of separate but similar kickback schemes to get access to Iraqi oil. The report, which also implicated other companies, said that in the early 2000s, Glencore made cash payments to one of its agents, and this agent made cash payments to an Iraqi diplomatic office in Geneva. Glencore called the payments a “success fee,” the U.N. report says. Glencore told the U.N. panel that “if it turns out” anyone paid bribes, that person violated instructions not to do so.
The onetime Marc Rich entity cited in the U.N. report denied wrongdoing. Mr. Rich’s current investment firm says it isn’t aware of any investigation of him. Based largely on the U.N. findings, the Swiss attorney general’s office is conducting a criminal investigation into a number of companies, which it won’t identify.
Even Glencore’s publicly held affiliates sometimes are dogged by its history of trading with pariah nations. Xstrata recently encountered questions about Glencore when Xstrata sought to buy a uranium miner in Australia. The government there said it could do so but imposed a requirement to consult authorities before allowing anyone else to market the uranium. Ultimately, Xstrata didn’t do the acquisition.
Glencore officials “are under pressure to prove they’re respectable” as they deepen their ties to banks and issue debt, says Mark Pieth, a Swiss law professor and one of the three U.N. panel members who investigated the Iraq oil-for-food arrangement. Glencore has sold more than $5 billion in bonds since 2003. Mr. Pieth says it is working to strengthen its compliance systems, though “it’s coming a bit late.”
Bond investors focus on Glencore’s thriving business. In its latest debt offering earlier this year, in London, bond investors offered to lend Glencore 10 times what it initially sought.
At Loomis Sayles & Co., a money manager that bought Glencore bonds in 2004, Diana Monteith, a fixed-income analyst, says bondholders’ interests are aligned with those of Glencore’s shareholders. “Everyone [at Glencore] is really incented to make sure there are good controls,” she says, because if someone makes a bad bet, “everybody’s net worth will go down rapidly.”
Glencore employee shareholders, who number 417 in all, can’t access their equity unless they leave the company. Departing employees must sell their stakes back to the company.
This arrangement can require Glencore to lay out big cash payments when some executives who have accumulated tens or hundreds of millions of dollars of wealth look to cash out. Rating agencies say there’s a risk Glencore could face a run for the exits during the current good times. Mr. Glasenberg has told investors that shareholder turnover is planned and orderly.
–Glenn R. Simpson, Paul Glader and David Gauthier-Villars contributed to this article.
Write to Ann Davis at ann.davis@wsj.com
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