Tuesday, July 26, 2011

"Glencore: The Perfect Arbitrageur"

A month old but worth the insight.
From Front Run Delta:
Glencore, Ltd. has been a fascination of mine for years. I first learned of their existence from Copetas' Metal Men and have tried to follow their actions in the media and within the industry since. They are viewed with a certain cult-like status in my eyes as the best of the best. The Maverick and Goose of international commodity trading. While I view their IPO as an unfortunate happenstance for their sake, I am ecstatic to have been given access to their prospectus.

A massive 1,637 page tome, their prospectus contains a wealth of information on strategy, risk and risk measurements, and the inner workings of the best arbitrage firm in the history of the world. That's correct, in the history of the world. Glencore's corporate grandfathers include firms like the Dutch East India Trading Company (VOC) and the English East India Company (EIC). Glencore is the quintessential case study in arbitrage techniques:
"Glencore focuses on maximising returns from the entire supply chain, taking into account its extensive global third party supply base, its logistics, risk management and working capital financing capabilities, extensive market insight, business optionality, its extensive customer base, strong market position and economies of scale."
"Glencore’s marketing activities source a diversified range of physical commodities from third party suppliers and from industrial assets in which Glencore has full or part ownership interests. These commodities are sold, often with valueadded services such as freight, insurance, financing and/or storage, to a broad range of consumers and industrial commodity endusers, with many of whom Glencore enjoys long-term commercial relationships." 
Types of Arbitrage Strategies 
"Many of the commodity markets in which Glencore operates are fragmented and periodically volatile. As a result, discrepancies generally arise in respect of the prices at which the commodities can be bought or sold in different forms, geographic locations or time periods, taking into account the numerous relevant pricing factors, including freight and product quality. These pricing discrepancies can present Glencore with arbitrage opportunities whereby Glencore is able to generate profit by sourcing, transporting, blending, storing or otherwise processing the relevant commodities. Whilst the strategies used by Glencore’s business segments to generate such margin vary from commodity to commodity, the main arbitrage strategies can be generally described as geographic-, product- and time-related." [Italics my own]
  • "geographic: where Glencore leverages its relationships and production, processing and logistical capabilities in order to source physical commodities from one location and deliver them to another location where such commodities can command a higher price (net of transport and/or other transaction costs); 
  • product-related: where it is possible to exploit the blending or multi-use characteristics of the particular commodities being marketed, such as the various crude oil products, coal or concentrates, in order to supply products which attract higher prices than their base constituents, or exploit existing and/or expected price differentials...MORE