The things that matter
It’s easy enough to get excited about Glenstrata, as some people are calling the possible merger of trader-miner Glencore and miner Xstrata. It would be a pretty big deal, even if the new company’s market capitalisation would be smaller than Facebook’s. But the deal wouldn’t be a game-changer – and that only illustrates the severity of the challenges facing the industry.
Sure, Glenstrata would join the elite club of BHP Billiton, Rio Tinto and Vale, and bring a large trading operation to that group for the first time. That is a shift, but not a great big one, especially as the two companies are already closely tied. Xstrata was spun out of Glencore, which still owns 34 percent of its Swiss neighbour and has contracts to trade much of its output.
But size doesn’t really matter when it comes to the three biggest issues faced by Western miners.
The first is the super-cycle, the years of high prices and profits for all operators. No one knows how long the good times will last, but they will be ended by some combination of slower economic growth in Asia, higher investments in mines and tighter monetary policy. The concentration of the industry is pretty much irrelevant in that context.
Second is the potential response of Asian customers to the high prices. As yet, they have done relatively little to push back, but the threat that the cash-rich Chinese will try to control more production should make Western miners very nervous. Size offers them little protection against a concerted attempt by customers to become price-setters instead of price-takers.
Then there is resource nationalism, the desire of governments to control the industry and to take a larger share of those high prices. That force has tripped up non-state operators everywhere from Canada to Australia, not to mention Chile and Brazil. Once again, big miners are hardly any better prepared to fight back than small ones.
If Glenstrata comes into being, it will benefit from the super-cycle. That’s great for whoever runs the new company, but he shouldn’t think that size brings safety.