Huge merger wobbles a lopsided world

Resources were firmly in focus this week after diversified miner Xstrata said it would accept a merger offer from commodities trader Glencore as a leaked ANC document said it planned a new tax of 50% on mining superprofits.

The combined Xstrata and Glen­core, with a market value of $90-billion, would become the fourth-largest commodities player after BHP Billiton, Rio Tinto and Brazil’s state-owned Vale. Should the deal go ahead, it would be the largest mining merger to date.

Glencore Xstrata, with revenues of $200-billion and profits of $16-billion, would have a higher turnover than the gross domestic product of many countries. It would control about 30% of the world’s coal supply and have significant sway over the production and marketing of many mineral and agricultural resources.

When Glencore floated on the London Stock Exchange last year, it listed its market share internationally as: zinc (60%), copper (50%), alumina (38%), cobalt (16%), nickel (14%), ferrochrome (16%) and lead (45%). Its energy division included coal (24%) and oil (3%), and its agricultural division included rapeseed (26%), sunflower oil (20%), soybean oil (9%), barley (11%), wheat (11%), corn (4%) and sugar (1%).

Glencore Xstrata is very much a private-sector operation. Chief executive Ivan Glasenberg has a 9% stake and he and his top 12 executives would control more than 25% of Glencore Xstrata, the Financial Times reported.

Glasenberg, a South African, and the 400-odd traders who co-owned Glencore until it listed a 20% stake last year, is a brilliant trader and businessperson, as is Xstrata’s Mick Davis, also a South African and former chief financial officer of Eskom, who put the mining conglomerate together after 2000.

ANC wants mining profits for the state
The ANC, the ruling party in reportedly the fifth-largest mining country, has signalled that it wants a much larger cut of mining profits for the state. A research team has mooted a rent-resource tax according to which normal corporate taxes apply until the company achieves a suggested 22% return on investment; above this profits will be shared on a 50-50 basis with the state.

The reaction to this has been both measured and hysterical. The measured believe the principle of the state sharing in the upside is acceptable, but they will have a lot to say about the amount. The hysterical are wailing that the tax on superprofits will be “worse than nationalisation”, suggesting that this lobby would prefer to debate the issue with noise and emotion rather than with reason.

Nationalisation as the ANC’s research committee has said, brings with it significant risks and costs and would be unaffordable and unconstitutional. The supertax aims to achieve greater revenues for the fiscus, partly to ensure greater equity overall.

The Financial Times, in a lead editorial this week, called the Glencore Xstrata merger “fit for world domination”. It said that the business logic for the merger of Glencore, the world’s largest commodity trader, with miner Xstrata was undeniable but, “alas, much of the gains investors count on making will come at the expense of the world’s consumers of commodities”.

A successful merger, it said, could spark an international buying spree as the company used its new muscle to snap up mines and miners, such as fifth-largest Anglo American.

“The public, as well as commodity-rich states, should be concerned. The extraction of many ores is already unhealthily concentrated within a handful of producers.”

Noting that Glencore Xstrata would dominate key markets such as in coal and copper, the Financial Times said there might be no legal avenues for opposing the merger because these markets were largely unregulated. It said that in the case of the Opec oil cartel the world could rely only on diplomacy.

Glencore and Xstrata — and a few companies that dominate global resources — preside over an increasingly unequal world in which protesters are demanding greater equity.

There will be much gnashing of teeth locally about the proposed 50% resource supertax. Many continue to believe that the government should limit its role largely to providing infrastructure and keeping its citizenry in check.

But unbridled markets are giving us a less equal world and I, for one, am happy that the ANC has put this proposal firmly on the table.

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