Prospectus reveals Glencore’s hybrid trader-miner model

THE full extent of Glencore’s reliance on its trading arm was laid bare yesterday, revealing that 44 per cent of its operating profits come from “marketing activities” as opposed to “industrial activities”.

The figure is key because many conventional commodities players are hesitant to invest in trading, a people business, rather than a business based on hard assets.

Some estimates before the release of the firm’s prospectus put its trading arm’s proportion of profits in the single digits.

But in fact, Glencore made $2.34bn (£1.4bn) of its 2010 earnings before interest and taxes (EBIT) from trading resources versus $2.95bn in EBIT from digging them out of the ground. And the vast majority of revenues came from trading (see “How Glencore is organised”?table opposite).

Its market share of tradeable commodities (resources that come to market as opposed to total global production) stands at 60 per cent in zinc, 50 per cent in copper, 45 per cent in lead, 38 per cent in alumina and 23 per cent in cobalt.

In addition, it is responsible for trading 28 per cent of the world’s marketable thermal coal and 12 per cent of metallurgical coal (used for making steel). Its agricultural division handles nearly a quarter of the world’s traded barley and 26 per cent of sunflower and rapeseeds.

The vast majority of its trading involves Glencore buying the commodities itself, exposing it to risks if it is unable to sell them on. But the strategy is based on arbitrage opportunities: as the world’s biggest supplier, with resources that include 207 oil tankers at its disposal, Glencore boasts that it can take advantage of price distortions much more quickly than its rivals.