Slump in Commodities Hits Glencore

Slump in Commodities Hits Glencore
October 7, 2015

 
Glencore (LON:GLEN) is trading at around the 100 level after a move to the downside that reminded market participants of Lehman’s collapse. Aside from the technical reasons for the move, the fundamentals are pretty important to consider here as well.

Glencore have highly diversified operations, and diversification would usually safeguard against market volatility, however they suffered an almost “lethal blow” recently. We believe this was largely due to strong headwinds from the commodity markets, as well as excessive debt levels. This forced Glencore to cuts jobs in a move to reassure investors that business was good, and is taking place as per usual.

Glencore is active in mining as well as commodities with over one hundred and fifty mining, metallurgical, oil production and agricultural assets. These are grouped in a global network of more than ninety offices located in over fifty countries, and employing over one hundred and fifty thousand people.

What led the company’s shares to be sold so aggressively into the 100 level? Especially considering that shares were above the 300 level at the end of April 2015?

The explanation is both technical and fundamental. From the technical point of view, we can consider a descending triangle breaking lower when the 250 level broke. The market then simply went for the measured move, or the thrust of the triangle.

While the technical picture seems to be simple, all of this started with a steep decline in oil prices. Even competitors such as Freeport-McMoRan are contemplating the decision of leaving the oil and gas business, to focus on their core copper. This is an attempt for this company to better control its market status.

Let us provide some perspective on the troubles caused by the oil market crash in 2015; just imagine that Glencore paid $1.4 billion dollars upfront to the state of Chad in 2014 for deliveries in 2015. We all know by now that at the time of the upfront payment, oil was trading above $100/barrel and now for the majority of 2015, oil is staying below the $50/barrel. A clear 50% financial loss is present in this transaction for Glencore.

The worst part of this situation above is that the payment was made via funds borrowed via banks. Due to this situation, if Glencore is to go down, they will drag their lenders down with them and we will see casualties from the banking system . If that wasn’t enough, troubles with other areas of their businesses is starting to surface as company’s solvency is being questioned.

In the meantime, whilst looking at that share price drop from the $300 to the $100 level, Glencore’s management tried to provide some reassurance by buying shares and showing confidence. However, I would say that if banks are not supportive in current situation things may go VERY downhill for this company.

It’s a tough call, but I am kind of favoring the upside for Glencore. This is due to the technical picture, as the triangle that broke lower is mostly retesting its b-d trend line. This may mean a move higher is on the cards, but the trade would be a risky one.

If traders that are not risk averse, then a one month expiration date, with a half or even a quarter of the regular investing amount should be considered. Just remember, you are in for one hell of a ride!

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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