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They’ll be richer, but we’ll all pay a price

Daily Mail on 8th February 2012 –  By Alex Brummer

Given that modern commerce is increasingly dominated by global behemoths, the planned £56billion merger of Swiss-based commodity trader Glencore and London-based mining giant Xstrata may seem unimportant to many.

Glencore, according to its website, ‘produces, sources, processes, refines, transports, stores, finances and supplies commodities needed by industries around the world’ — whether those commodities are grain, metals, coal or oil.

It already owns 34.4 per cent of Xstrata, so at first glance this appears to be no more than a tidying up exercise with their respective bosses, both South African exiles, sharing the spoils.

Indeed, the two companies are confident they can convince authorities in Europe and around the world that they are already ‘family’ and there is therefore no need to scrutinise the deal to see if it threatens global competition.

But the reality of bringing them together is much more threatening than it might seem. Xstrata is, at present, a straightforward mining company that extracts resources from the ground, then sells them to other businesses.

But Glencore’s business model is very different. As a commodity trader it plays the market — holding on to commodities by storing them, refining them or processing them — and gambles on selling its goods at the most advantageous price when the time is right.

The proposed new enterprise, nicknamed ‘Glenstrata’ in the financial world, would adopt this Glencore business model and become the world’s first natural resources group to control every stage of the supply chain, from the commodities it mines (such as metals) and grows (wheat and corn) to market. This would mean it could control the prices of all manner of everyday household goods, from fuels and electrical wiring to bread and cereals.  Britain plays host at present to several large-scale mining groups including Rio Tinto and BHP-Billiton.

Even though Rio Tinto and BHP operate mines across the globe, they do not trade and speculate in the coal, iron, copper and other precious metals they mine. In contrast ‘Glenstrata’ will control immense mineral extraction and farming activities, and trade in the resources produced by those activities.
That means Glenstrata will have control over both production and trading.

As a result it will be able, should it choose, to control the world supply and prices of vital materials by hoarding them until the price rises or, in the case of grains, holding them in store houses — like a scene from biblical Egypt — to await a drought then carefully let supplies onto the market as the price rises.

This will endow Xstrata-Glencore with enormous power. China, India and the newly industrialised world compete for materials and commodities with the U.S., Japan, Germany and Britain.  And Glenstrata with its hold over so many basic materials will often hold the whip hand. The price of basic goods — from bread to the copper wire needed to carry fast broadband to our homes – will potentially be in its hands.

And it is not just rich countries that will be vulnerable. The very poorest nations, needing basic foodstuffs to keep their populations alive, could also suffer at the hands of such a global monolith. Only this week it was disclosed that for the past eight months Glencore has been the biggest single supplier of wheat to the UN World Food Programme — taking more than £50million of its aid budget.

The dominant role a combined Glencore and Xstrata will have in commodity markets does not bear thinking about.

Glencore already controls some 60 per cent of the world’s free market zinc; 50 per cent of copper metal; 45 per cent of lead, plus great slices of the aluminium, nickel, cobalt and ferrochrome (a chromium and iron alloy) market.

It is also a huge player in the grain and other ‘soft’ food commodity markets. Xstrata, meanwhile, is a powerhouse in coal, as well as steelmaking. The new company would be responsible for a third of the world’s exported coal.

That and all the other commodities over which it has such a tight grip will constitute a terrifying degree of market dominance that can only become a source of grave misgiving to consumers, regulators and world governments.

Not surprisingly the proposed merger has lifted the gloomy mood of the global financial community. If completed, it will be the biggest deal since the financial crisis of 2007-09: fees for bankers involved are expected to be £90million or more.

But while City mercenaries are keen, some shareholders are less enthusiastic.

They fear that earnings from Mick Davis’s highly successful pure mining venture Xstrata could be sullied by linking up with a company that gambles on the volatility of commodity prices.

In the end, this deal will be decided not by shareholders but by countries and competition watchdogs.

We often complain that the European Commission interferes too much in the domestic affairs of its members. But this deal screams for a full-scale competition inquiry to kill it dead in its tracks.

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