9 October 2015

Glencore (GLEN) shares topping the UK Index this morning, helped by rising commodity prices after dovish Fed minutes weakened the USD (notably Oil and copper) but more importantly by GLEN’s decision to leave a load of Zinc in the ground. After years of commodity-wide over-investment on high prices now resulting in supply gluts because of slowing global growth (notably china which consumes 40% of world Zinc), the decision is designed to restrict market supply and help put a floor under prices which have fallen to 5yr lows.

Removing 500K tonnes from world Zinc production will reduce GLEN production by a third and global supply by 4%. While the company will benefit from reduced supply and higher prices valuing its reserves of the scarce material more favourably, less production nonetheless means less sales, less revenues and thus reduced profits. However, the share price reaction suggests investor belief in the company doing the right thing by cutting production  in Copper, Zinc, Lead, etc, buoying material prices to help boost long-term shareholder value, especially for those who remained loyal thought the recent share price roller-coaster (management included). Disappointing results last night from aluminium giant Alcoa, whose products are also used in cars, aerospace and buildings, just highlights the oversupply vs waning demand battle and how, it would appear right now, the only way is ‘cut’.

Mike van Dulken, Head of Research