As mining giants Glencore and Xstrata readied their merger in 2012, five MBA‘12J students participating in the “Industry and Competitive Analysis” (ICA) elective were presented with an option; take an exam or complete a report on the company of their choice. They chose to study Glencore in the run up to its acquisition of Xstrata.
At the end of their course, Karel Cool, the BP Chaired Professor of European Competitiveness and Professor of Management at INSEAD, asked Olivier Daviron, João Almeida D’Eça, João Mendes, Edoardo Vallardi and Matthias Wefelnberg if they would like to write a case with him based on the report that would be of use to many future students of the elective. They all agreed and worked on the case long after graduation.
After it was published, the case was widely used in classes and it also piqued the interest of Ivan Glasenberg, Glencore’s CEO and now chief executive of the merged Glencore Xstrata, so much so that he agreed to take part in a class discussion on the case by video conference in April.
Three students were selected by Cool to present their assessment of Glencore’s market position and rationale for acquiring Xstrata to Glasenberg and the class. At the time, Glencore planned to create a business with $209 billion in sales by combining Glencore’s global trading network for energy, metals and farming products with Xstrata’s coal, copper and zinc mines.
In addition to the industry chatter at the time and the increased detail the case went into, Glasenberg further enlightened the ICA class on how Glencore had acted to respond to the industry situation at the time and integrate the two companies after the merger.
Student analysis
Dina Carabas, Pablo Rojo and Thomas De Clerck’s presentation provided insights into Glencore’s position from the case and their own research.
De Clerck started off with an overview of the industry, providing background from the case and industry data.
He explained that at the turn of the millennium, demand for copper increased dramatically, driven by the development of markets such as China, the world’s single largest consumer (36 percent of total). New mining sites were expensive to develop and required substantial time to develop. Consequently, demand outstripped supply, causing prices to skyrocket by 500% from 2002 to 2008. After the financial crisis, demand was slightly eroded, but by 2011, copper consumption had reached an all-time high. De Clerck explained that there were opportunities to control copper reserves by buying tier-2 mines (brownfield development), rather than bringing on-stream very expensive tier-1 assets (greenfield).
Carabas looked at the scarce resources and state of play for industry players.
The market for copper traders was becoming more challenging. Some major miners had become vertically integrated into marketing, with production sold directly to consumers. End-users, backed by governments (notably China’s) had also acquired copper assets or become traders to become independent of multinational trading companies. This has made a significant portion of the market “non-addressable”, or closed to the major traders.
Major players in copper production were Codelco, BHP Billiton, Freeport-McMoRan, Xstrata and Rio Tinto, which between them accounted for 37 percent of total world primary copper production. Consolidation was taking place and was driven by the increasing cost of operating mines, difficult financing conditions and underinvestment in copper assets thanks to depressed prices before the boom in demand.
Glencore, therefore, needed more leverage to be able to enter the non-addressable market. According to Carabas, there was intense pressure to gain more control over production cost and improve arbitrage opportunities. Glencore sat in a prime position in marketing, being able to trade, blend and ship products, but Xstrata has a big presence in production, exploration, mining, smelting and refining.
Rojo then led the class in an assessment of the financial standing of Glencore and Xstrata, explaining why they were a good match. While Glencore had originally spun Xstrata off, it was not the same company as before. It had been through a raft of acquisitions, but its performance relative to its peers was not as good as it could have been.
Rojo also analysed Glencore’s proposed premium of 17 percent pointing out that it would be justified if Glencore’s marketing expertise were applied to Xstrata smartly, redundant resources were disposed of and the supply chain was successfully integrated.
There were, however, still risks for Glencore from the merger. Rojo pointed to the sheer scale of integration and competitor perceptions of Glencore as a threat.
Glasenberg’s response
Glasenberg commended the students for their thorough analysis and agreed with the situation they had painted for Glencore at the time of the merger. The company, he said, felt it needed to own the commodity producing assets, such as mines, that would feed into its trading system to give it more power in the market and economies of scale. Glencore also took the view that it could run the assets better.
Glasenberg also agreed with Rojo’s assessment of a good cultural fit between Glencore and Xstrata as both companies preferred to buy brown field mines than develop them from scratch. Glencore was also able to cut down on duplication and find cost savings.
He countered the perception that competitors would have shied away from trading with the bigger Glencore by explaining that competitors actually became more eager to deal with the firm as it had become a major producer, not just a trader, so overall it helped the company’s trading business.
The case study Glencore, Xstrata and the Restructuring of the Global Copper Mining Industry in 2012 remains an important part of the ICA elective, where future students will now be able to learn from the direct input of the CEO who oversaw the merger, in addition to the case itself.
