Ambitious plans by the world’s largest commodities trader to raise capital in the London and Hong Kong markets may be at risk from the threat of international regulatory scrutiny of the sector.
Meeting in Washington last Friday, finance ministers from the leading G20 economies lashed out in response to inflationary pressures which are upsetting their carefully crafted economic recovery strategies.
Inflation is being driven by spiralling prices of food and raw materials. The ministers believe that unsupervised speculative commodities trading may be partly to blame.
Briefing papers prepared by the World Bank warned the meeting that the current spikes in food prices “pose fundamental food security risks for consumers and governments, while discouraging needed investment in agriculture for development.”
The Bank estimates that, between June 2010 and February 2011, 44 million people slipped beneath the international poverty line. It predicts that a further 10% rise in world food prices would add another 10 million to the roll call of extreme poverty.
Despite this humanitarian distress, or perhaps at its expense, there are winners to be found within the market chaos.
Higher prices inflate the earnings of the small number of companies that control global trade in agriculture and mining commodities. Handsome profit announcements have emerged in recent weeks from agribusiness corporations such as Cargill and Bunge.
To capture this value, the giant Swiss-based Glencore International announced last Thursday its plans to become a public company, offering to sell about 20% of its shares, mostly in London.
The mid-May flotation may raise over $10 billion, potentially the largest call in the history of the London Stock Exchange. Glencore’s top 65 executives are set to make paper fortunes in excess of one hundred million dollars each.
The timing of Glencore’s announcement carries an element of risk in its close proximity to the G20 meeting. The French government, current chair of the group, has made no secret of its intention to persuade world leaders to introduce regulations for commodities trading when they meet in Cannes in November.
Institutional investors will mark down their valuation of Glencore if they believe that new regulations are in the pipeline.
“We stressed the need for participants on commodity derivatives markets to be subject to appropriate regulation and supervision,” was the verdict of the G20 finance ministers in their communique issued on Friday. The French are not bluffing.
Arguably more significant than the G20 meeting was a simultaneous gathering of leaders of the BRICS countries, Brazil, Russia, India, China and South Africa.
Despite their physical and philosophical distance from the Washington citadel of world finance, the message from Hainan in China was almost identical.
“The regulation of the derivatives market for commodities should be accordingly strengthened to prevent activities capable of destabilizing markets,” declared the BRICS leaders. China and India in particular are sorely troubled by fears of the social unrest that may result from rising food prices.
Although the main target of new regulations would be the investment banks which devise and trade complex index securities based on commodity prices, companies such as Glencore are responsible for the underlying contracts for delivery.
They have close commercial links with the banks and are further rewarded by rising prices. The G20 countries have commissioned a report to examine whether the volume of speculative trading contributes to higher prices, over and above more conventional fundamentals of supply and demand.
Glencore faces additional scrutiny through London Stock Exchange rules demanding disclosure of information that has until now been kept under wraps. The company has a history of reticence in dealings with the media.
There was a sharp intake of institutional breath at the news that Glencore not only manages at least half of the world’s market-making for copper and zinc, but also owns interests in mining and processing. Possession of such sensitive market information in parallel with price-setting is bound to offend principles of liberal markets.
Responding to the Glencore revelations, Saturday’s leading article in the influential Financial Times concluded: “if policymakers leave commodities trading unattended, this erstwhile backwater could one day become a sea of economic troubles.”
Glencore’s market share of agricultural trading is much smaller but the genie of regulatory risk is out of the bottle.
The shift in sentiment towards the regulation of commodities trading within the space of a week will come as a boost to anti-poverty campaigners. International NGOs have been pressing for a clamp-down on speculators since the food crisis of 2007/08.
“Stop gambling on food and hunger” was the title of a letter signed by over 100 civil society groups around the world prior to the February G20 meeting. The letter called on ministers to rein in the “small but powerful group of vested interests who are profiting from an activity that is fundamentally harmful to the vast majority of people.”
Luc Lempriere, Executive Director of Oxfam France, gave a swift welcome to Friday’s outcome. “Fast action is needed on the G20’s call today for better transparency and regulation of commodity markets. Excessive speculation is amplifying price volatility and exacerbating the food crisis,” he said.
Glencore is relying on an old adage of the London stock market: “sell in May and go away.” And the company will be hoping that the unpleasant preliminaries of washing its dirty linen in public may soon by hidden from view by the distraction of the royal wedding.
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this article was first published in the OneWorld section of Yahoo World News