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Mysterious inventory

27 Oct 2015 By Andy Critchlow

It’s time Ivan Glasenberg came clean about Glencore’s inventories of commodities. A trader by nature, the Swiss commodity group’s chief executive is reluctant to provide the market with more than the bare minimum of information about its stockpiles. But the rewards of more disclosure might outweigh the risks.

Although Glencore provides an estimated value of its marketable inventories based on a measure of their fair value, it does not provide a detailed breakdown of volumes, or the specific mix of resources such as copper, zinc and oil that it has available to sell at any given time. In its last set of financials dated Aug. 19, the company reported the value of these inventories at $17.7 billion.

Based on declines in commodity prices over the last six months, that figure could now easily be much lower. If Glencore’s hoard had tracked the S&P Goldman Sachs Commodity Index, its value would be well below $14 billion by the time Glencore reports its latest production figures next month. That doesn’t factor in whether the company has added to or reduced the volumes in its stockpile.

It matters for two reasons. First, investors can’t really guess what direction the stockpile’s value is moving in. The other is liquidity. Glencore says its inventory is fully hedged and as good as cash on its balance sheet. But are shipments of zinc and copper really cash-like? Ratings agencies are divided. If not, the company’s net debt of around $30 billion – which is calculated after deducting the value of these inventories – would really be closer to $50 billion, and hitting a target of $20 billion would be much harder.

Investors could make a better call if they knew more. Oil, for example, can be sold quickly into the market at the going spot price. Base metals like aluminium are different. Glencore’s hedges are billed as eliminating any chance of losses, but investors don’t know enough to decide for themselves.

Glasenberg may not relish the idea of more transparency. If rivals and hedge funds knew what Glencore held, they might bet against it. But if he doesn’t, Glencore’s share price will remain volatile, and debt providers may also become nervous. For them, the less mystery the better.

This item has been corrected to reiterate in paragraph five that Glencore says its hedges remove any chance of losses on its inventory.


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