High prices have stirred trader’s geopolitical risks

GLENCORE has warned investors that it faces significant geopolitical risks that could materially impact its business, with “increased resource nationalism” due to high commodity prices flagged as a possible flashpoint.

The company has endured repeated attacks on its corporate governance standards in the run-up to its float, with allegations that one of its subsidiaries has avoided taxes in Zambia.

But Glencore has highlighted that it is also at the mercy of governments that “may decide not to recognise previous arrangements if they regard them as no longer being in the national interest”. The risks include civil war, terrorism, export controls, laws against foreign ownership, imposing new taxes or nullifying leases and land rights agreements. Its main strategy for mitigating political risk is diversification, the firm says.

Among the other risks the company flags are “prolonged price stability”, which would affect its arbitrage-based trading strategy, exchange rate exposure and counterparty risk.

In particular, the trader sometimes signs contracts for the supply of a particular kind of commodity (for example, Russian wheat), leaving it out of pocket if supplies are cut off (as during the Kremlin’s export ban last year).


Bolivia 2007

In case investors doubt the seriousness of the legal and political risks Glencore faces, it cites an example in its prospectus: “In 2007, the Bolivian government nationalised a smelter owned by a subsidiary of Glencore. However, in that instance, no material losses were sustained and Glencore continues to do business in Bolivia,” the company said. It has since complied with local law to enter partnerships with the government to extract resources, it says.


But the firm’s legal troubles are not just from sudden changes in law. Glencore has revealed that one former and one current employee of its Belgian subsidiary Glencore Grain Rotterdam are awaiting trial on charges of “having committed corruption in exchange for information covered by professional secrecy in the course of the applications for European export restitutions”. The European Commission is seeking unkown damages in the case.