Global commodities have been in free fall lately and there is no end in sight to the downward trend the underlying markets have been in. Asset-stripping, holding back on capital expenditure, and reduction of headcount have been common methods used by commodity-related companies to combat the weak prices, but Glencore is better positioned than its rivals as it has an extensive division to take advantage of the market volatility.
The Swiss-based commodity giant has a commodity trading division which generated 42% of its income in 2014, and that same operation produced 32% of group profits in 2013. Much like the large investment banks who amounted vast profits from dealing teams when volatility was high during the credit and debt crisis, Glencore will stand to benefit from the large fluctuations in price in metals and energy products seen this year.
The share price of Glencore is tracking the commodity markets lower, and it is a similar picture across the board, but Glencore isn’t incurring such large falls in net profit. In 2014, the firm revealed a 9% drop in annual earnings, and that is impressive for the mining sector at the moment. In August 2014, Glencore made a takeover offer for Rio Tinto, which was rejected and Rio’s stock has tumbled 20% since. Glencore has been cautious to go on the acquisition trail since, and that tells us all we need to know about its outlook for the commodity sector.
When the firm announces its first-half results the market is expecting revenue of $81.46 billion and adjusted net income of $848 million, and that compares with the second-half revenue and adjusted net income from last year of $107 billion and $2.27 billion respectively. Glencore will report its full-year results in March 2016, and dealers are anticipating revenue of $180 billion and adjusted net income of $2.37 billion, which compares with last year’s revenue and adjusted net income of $221 billion and $4.28 billion respectively.
Equity analysts are bullish on Glencore, and out of the 30 ratings, 13 are buys, 12 are holds, and three are sells. The average target price is 280p, which is 41% above the current price. Investment banks are also bullish on Rio Tinto, and out of the 32 recommendations, 13 are buys, 16 are holds, and three are sells. The average target price is £29.67, which is 15% above the current price.
Now that the share price has dipped under 200p and set a new record low, and given the sentiment surrounding the mining sector is negative, we can expect further declines in the near-term.