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Mine craft in a commodity bubble – peaks and troughs for Glencore

The ‘mining giant’ Glencore, a commodity trader/mining company formed in the heat of a commodity price boom a few years ago, appears to be encountering some difficulties, of the sort that you find when your debt exceeds the value of your assets. The current instar of this company formed as commodity prices ‘boomed’ (for no obvious reason it would seem, it was on the back of a rather well-noted ‘recession’), with a take-over of the Anglo-Swiss commodity trader/mining company Xstrata in May 2013. Now, however:

Hunter Hillcoat, an analyst at Investec, said: “Mining companies gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the great financial crisis.
“The consequences are only now coming home to roost, as mines take a long time to build.”

The CEO of Glencore, Mr Ivan Glasenberg, is certainly a very capable and impressive individual, and had, when younger, been a world-class race-walking athlete, barred from international competition by his South African citizenship. We were even fed stories of how, when he paid his income tax in the Swiss village he calls home, Rüschlikon, the locals got a rebate on their income tax (how distasteful, why not cut taxes for the man himself with a cap on total take, like the Isle of Man?)

Could it be perhaps that the monetary policy of the Federal Reserve, followed by others around the world, had created an illusion of value in the mining sector, that led to what (for now) might appear to be a prodigious mal-investment, as commodity prices fall?

Mr Glasenberg has followed the ‘price signals’ coming from the markets in building up the company that he manages. Now, however, the price signals may well have been a mirage. What if debt had not been ‘cheap’? Might this company now be in better shape? Wouldn’t almost any Austrian economist have said, back when this merger was being contemplated, that commodity prices were a bubble (and that they still are)? Would anyone involved, blessed with some foresight, economic knowledge and patience, have said ‘Let’s wait for the bust after the boom before deciding what to do next.‘.

(Of course, the boom in money hasn’t ended yet, it’s just that the prices have stopped moving up for now). Then again, why should those involved care?

Now consider that lesson right across the world, what might it look like if ‘cheap debt’ had never existed, but only debt that came, not from creating money from nothing in a fiat money system via Central Banks, but via borrowing others’ savings, which were not being spent elsewhere? Everything from the cost of a home’s rent or mortgage, to the cost of the metal in a nail on your wall, might be different. What might that world look and be like?

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6 comments to Mine craft in a commodity bubble – peaks and troughs for Glencore

  • Mr Ed,

    Now consider that lesson right across the world, what might it look like if ‘cheap debt’ had never existed, but only debt that came, not from creating money from nothing in a fiat money system via Central Banks, but via borrowing others’ savings, which were not being spent elsewhere? Everything from the cost of a home’s rent or mortgage, to the cost of the metal in a nail on your wall, might be different. What might that world look and be like?

    Culture would be more traditional. Feminism, egalitarianism, and secularism would be less impactful on society. Religion would occupy a bit more of a visible station in the culture – and be mocked a bit less frequently.

    Private charity, having never been substantially supplanted by the welfare state, would be more important to the lives of poor people.

    The financial sector would not reap quite such (relatively) disproportionate profits compared to those profits generated in other sectors of the economy.

    Partly due to these aforementioned points, cities, while retaining their status as centers of commerce would be less relatively powerful in relation to suburban and rural areas.

    Socially accepted morality would be a bit more in tune with farmer morals and less so with forager morals, as per Robin Hanson – an economics professor at George Mason University.

  • Paul Marks

    What would the world look like?

    Well I am not sure what the world would look like – but New York City would look very different.

    Even before the 1913 Federal Reserve Act, New York City was distorted by the National Banking Acts – which favoured banks based in the city, pushing up real estate prices and encouraging the over building of financial industry offices at the expense of everything else.

    After 1913 – step-by-step this process became extreme.

    People forget that New York City is not “new” at all – it is a mature city (for example older than St Petersburg).

    It used to have lots of interesting buildings and lots of character – look up the old photographs.

    Now it is, in large parts, a collection of office blocks (literally “blocks”) – a sickness that has spread to other cities.

    Nothing has been safe from the wreaking ball – not the homes of the humble or the mansions of the rich (not even some noted places of the rich) – everything has to make way for more and more office space, office space devoted to the Credit Bubble “financial services”.

    A city with lots of industry (all sorts of industries and trades) is now totally dependent on one industry – financial services.

    In essence New York City (a city of some seven million people) has become totally dependent on the New York Federal Reserve.

    It is a nightmare – waiting to happen.

    As this credit bubble city will fail.

    Before Mr Ed jumps in – I know there is little industry left in London either.

    Another credit bubble city.

    However, there is no good reason why various trades and industries could not move back to London when the Credit Bubble economy collapses – and property prices (and other costs) fall.

    New York City has some of the highest taxes and worst regulations in the United States – it is totally dependent on the New York Federal Reserve, without the flow of funny-money from the Fed there would be little reason for productive enterprises to be based in New York City. Even the media would move out – in the electronic age why be in the high tax place?

    That is why I say it (a city of some seven million people) is a nightmare waiting to happen.

  • Paul Marks

    As for Glencore – it is the canary in the coal mine.

    “Nano tech” and so on has not yet produced traditional manufacturing.

    If the world economy was doing well (as the establishment claim) then Glenco (which produces the raw materials needed for manufacturing) would be doing well.

    The low price of basic commodities shows what the world economy really is.

    Froth – a vast Credit Bubble.

    It should have gone years ago – it has been kept going by the fanatical actions of governments and those allied to them, who have acted in an extreme way – far more extreme than expected, I thought they would draw back from sacrificing everything to the Credit Bubble I WAS WRONG.

    I WAS WRONG.

    The establishment elite have not drawn back from sacrificing everything to keep the Credit Bubble going.

    There is nothing left now.

    No way to save anything.

  • CaptDMO

    Meanwhile National Dutch Petroleum has simply thrown in the towel on Alaskan mining leases.
    Award winning NYT economist Krugman unavailable for comment.

  • John Galt III

    The Central banks of the world are the only thing keeping Western countries (and Japan) viable. All our countries have way too much debt. Rogoff and Reinhart (It’s Different This Time) wrote about countries where the debt/GDP is too high. When it reaches 90% slow growth ensues. That is where we are now. So we have ZIRP policies that enable government to borrow w/o increasing their interest expense. As older debt at higher rates is retired newer debt at zero interest rates takes its place. This can go on for a long time.

    This all ends when people lose their faith in their governments and their currency. That is to follow and is inevitable. The socialist Ponzi scheme transfer payment economies will then have to reform. The only question at that point is whether we retain our freedoms and liberty or the left crushes our countries into totalitarian entities. As the left got us into this mess I hope the people see this folly and fight to retain their liberties.

  • Laird

    I don’t know that Fed monetary policy directly “created an illusion of value in the mining sector”; what it did was create the illusion that the recession was over and economic growth had returned. Manufacturing (especially in China) increased as a result, and Glencore merely supplied some of the necessary raw materials. I don’t really fault them for that. Indeed, all mining companies, especially those in Australia, have been hurt by China’s pullback.

    (And yes, I know that you’re using Glencore as merely an exemplar for discussion of global monetary policies in general, but I would like to point out that its stock price has rallied and at least one analyst called the sell-off “irrational” and said “Unless you think commodity prices are going close to zero, then this was overdone.”)

    Nonetheless, I agree with what I take to be your central premise, that unlimited monetary expansion is unsustainable and will eventually lead to ruin. Paul is correct to call Glencore “the canary in the coal mine”; it is a leading indicator (depressed commodity prices in general are another) that the much-touted “expansion” is not nearly as robust as our betters would have us believe, and that we are headed toward another global meltdown, this one far more serious than in 2008-ish. Buckle up; it’s going to be a bumpy ride.

    As to your counter-factual about a world in which money weren’t created out of thin air by central banks, I suppose Shlomo Maistre’s scenario is as good as any.