Friday, May 13, 2011

A huge sign of a top in commodities

From Bloomberg:

Glencore International Plc received enough demand from investors for its $11 billion initial public offering to sell the shares more than twice over, according to three people with knowledge of the matter.

Highbridge Capital Management LLC, a hedge fund owned by JPMorgan Chase & Co., proposed a $500 million investment, said one of the people, who declined to be identified because the information isn't yet public. The last orders for the offer are due on May 18, with final pricing to be disclosed the following day, according to a term sheet for the sale.

Demand for stock in the world's largest commodities trader has weathered a rout in raw materials prices last week, the biggest in two years, which wiped out $99 billion of market value. The IPO, the largest since General Motors Co. sold stock in November, will give Glencore a value of $61 billion if priced at the midpoint of its offer range, the company said last week.

Glencore is offering as many as 1.25 billion shares. London shares are priced at 480 pence ($7.84) to 580 pence each, a prospectus published last week shows. The company today priced stock to be listed in Hong Kong, representing 2.5 percent of the total offer, at HK$61.24 ($7.88) to HK$79.18.

Citigroup Inc., Credit Suisse Group AG and Morgan Stanley are among banks managing the IPO. Current holders may sell additional shares for tax purposes, while an overallotment options brings the total offer to $11 billion.

Cornerstone Investors

Demand was spurred by interest from so-called cornerstone investors, including Abu Dhabi's sovereign wealth fund and BlackRock Inc., which agreed to buy 31 percent of the shares in total, three people with knowledge of matter said last week, declining to be identified because the information is private.

Glencore's inclusion in the U.K.'s FTSE-100 Index of stocks also likely fueled demand as it promotes buying by funds tracking the benchmark, Paul Galloway, a London-based analyst at Sanford C. Bernstein Ltd., wrote in a May 6 report.

Dave Millar, a spokesman for New York-based Highbridge, and Simon Buerk, a spokesman for Baar, Switzerland-based Glencore, both declined to comment when contacted by Bloomberg News.

Glencore "has got characteristics that are quite attractive and that is because it's not a pure commodity-related play, that it is quite defensive," JPMorgan's Ian Henderson, a manager of about $10 billion in natural-resource assets, said in a May 6 interview. "In theory Glencore should outperform in periods of commodity price weakness. So it does have a role to play in portfolios."

Commodities Slump

Slumping commodities, on the other hand, erode the value of Glencore's corporate investments. The trader's 10 largest holdings, including a 34.5 percent stake in Xstrata Plc, fell 7.4 percent last week, slashing about $2.4 billion off their value, according to an index of the company's investments.

Slower U.S. services growth and fewer German manufacturing orders helped drive the Standard & Poor's GSCI Index of 24 raw materials down 11 percent, the most since December 2008.

Global investors have tempered their optimism about the U.S. and world economies and plan to put more of their money in cash and less in commodities over the next six months, a Bloomberg survey found.

Almost 1 in 3 of those questioned said they will hold more cash, while 30 percent intend to reduce investments in commodities, according to a quarterly Bloomberg Global Poll of 1,263 investors, analysts and traders who are Bloomberg subscribers. Both results were the highest since the survey began asking the question last June.

Market 'Froth'

Much of last week's slump in commodity prices was the result of "froth" in the market, "a lot of speculators who are taking long-term positions on commodities," Glencore Chief Executive Officer Ivan Glasenberg, speaking from London, told a Hong Kong press conference today. "We still see strong demand in Asia, continue to see mining companies struggling to produce, to increase production to meet this demand. Underlying fundamentals remain strong."

Glencore is eligible as a "fast entrant" to the FTSE U.K. Index Series and will be included in the FTSE-100 Index on May 25, FTSE said in a May 6 statement.

Inclusion in the index ensures Glencore "will become an essential investment for index-tracking funds," Bernstein's Galloway said. Such funds may buy about 13 percent of the equities on offer in the IPO, he said.

"The fact that it is going be in the index early on means that there is going to be natural buying," Henderson said.

Glencore is ending more than three decades of operating as a closely held partnership. The company changed its name from Marc Rich & Co. after management bought out former fugitive U.S. financier Rich in 1994. It employs 2,700 people at trading units in 40 nations and about 54,800 people at industrial units in more than 30 countries.

Aabar Investments PJSC, an investment arm of the Abu Dhabi government, is investing $850 million, and BlackRock is buying $360 million of shares, making them the two biggest cornerstone investors. Credit Suisse, Fidelity Investments, Government of Singapore Investment Corp., UBS AG, Zijin Mining Group Co. and a number of hedge funds are also investing, the prospectus shows.

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