“Glenstrata” megamerger unearths concerns

Workers walk past tin ingots at a Bolivian smelter owned by Glencore until it was nationalised in 2007 Keystone

The planned $90 billion (SFr82.5 billion) merger between Swiss-based companies Xstrata and Glencore is generally considered to make sound business sense.

But non-governmental organisations (NGOs) are worried about further exploitation in poor countries and some politicians fear damage to Switzerland’s image.

The combined company, to be called Glencore Xstrata, will control a chain of businesses from mining to refining, storage and shipping of basic commodities like coal, copper and corn. It will be around twice as big as the next largest Swiss company.

“Because size always fascinates people, the chances are greater that in future the Swiss economy will be just as closely associated with commodities trading as it has been for ages with banks and pharmaceutical companies,” wrote Zurich’s Tages-Anzeiger on Wednesday.

This, it added, was not necessarily a bad thing, but it urged the commodities sector – and the Swiss government – to learn from the headache caused by Swiss banks from the 1970s onwards and become accountable to the public early on to avoid exposing themselves to reputational risks.

“Many mining areas are owned by dictators, the acquisition of mining rights are often barely transparent and ecology remains a foreign word in this sector,” the paper noted.

Low standards

Olivier Longchamp from non-governmental organisation the Berne Declaration said the extractive industry was one of the economic sectors most linked with human rights and ecological and social issues in developing countries.

“We now have a global giant of the extractive industry setting up its headquarters in Switzerland. We’re very concerned by that,” he told swissinfo.ch.

In September 2011, the Berne Declaration published a book that took an in-depth look at the notoriously secretive extractive industry (see related story).

According to “Commodities: Switzerland’s Most Dangerous Business”, the 15-fold increase in trade between 1998 and 2010 led to huge inequalities and high social and environmental costs for poor nations rich in natural resources.
 
“Standards in the sector do exist internationally, but they’re still very low,” Longchamp said.

“Xstrata is more or less compliant with the minimum international standards in that sector, but Glencore, which is not an extractive industry company in itself, is absolutely not. About 70 per cent of Glencore’s extractive business is done in countries with real problems with regulation like Kazakhstan, the Democratic Republic of Congo and Equatorial Guinea,” he said.

“Switzerland must improve its legislation to allow NGOs for example or victims at least to ask the main offices of such holdings to endorse their responsibility for what their branches have been doing abroad.”

“Moral issues”

Politicians on the left – possibly mindful of Transocean, the Swiss-based company involved in drilling the deep-sea well that blew out in the Gulf of Mexico in 2010 and spawned America’s largest offshore oil spill – have also warned of risks to Switzerland’s reputation if the country turns into a massive commodities hub.

“The bigger a company, the more powerfully it can stand up against governments and take less notice of moral issues,” said Hildegard Fässler from the centre-left Social Democratic Party.

Pointing to not only environmental catastrophes but also armed conflicts and “serious human rights violations, which often occur in resource-rich countries”, she wanted the cabinet to investigate the sector and come up with measures to protect Switzerland’s reputation.

Geri Müller from the Green Party agreed. “The banks have already given Switzerland a terrible image – commodity trading threatens to be the next fiasco,” he said.

But Hans Kaufmann from the rightwing Swiss People’s Party was not convinced. “If we tighten the laws, trading will simply move to countries like China, where the human rights situation isn’t better,” he said.

Growing demand

China is one of the countries where Glencore Xstrata will hope to reap the reward of growing demand for commodities.

“Commodities by definition are finite. As the global population grows and emerging economies have high demand for commodities, companies dealing in natural resources are destined to see profits rise,” Joseph Di Virgilio, a commodities expert and chief investment officer for Ardour Asset Management, which specialises in alternative energy and natural resources segments, told swissinfo.ch.

Nevertheless, competition authorities are expected to take a hard look at the new company, which will hold a big sway over markets such as thermal coal, copper, zinc and ferrochrome.

Di Virgilio played down the danger of a quasi-monopoly over minerals crucial to energy generation and manufacturing.

“There are some risks regarding control over their products but in terms of monopoly I’m not too worried since there are bigger conglomerates. Let’s not forget that the bulk of their businesses are set by trading markets and are highly regulated.”

Made in heaven?

“The technical term is vertical integration – it’s like retailers who decide for certain product lines to produce the goods themselves,” Christian Gattiker, chief strategist and head of research at Bank Julius Bär, told swissinfo.ch.

“That has pros and cons: you have direct access to the production base and you can distribute it in a global framework, but it may not be as focused anymore,” he said.

“Some companies like to be very focused and basically do what they know best, but I think if you’re in an environment where there’s a natural scarcity for the good you produce, it makes a lot of sense to have this security of production.”

But as the Financial Times said in its editorial on Monday, “for the two companies and their investors there is no doubt that theirs is a marriage made in heaven. For customers, the consequences of this mining mega-deal look a long way from paradise.”

The new company

Headquartered in Switzerland.

Assets and projects in 33 countries.

Around 130,000 employees.

Glencore Xstrata’s mining assets will include more than 100 mines, 30 concentrators,

25 base metals smelters, eight copper solvent extraction plants, four copper electro-winning plants, eight base metals refineries and precious metals refineries.

Other assets:

A global network of warehouses with 1.5 million tons of concentrate and metal storage capacity and access to 100 tank farms/oil terminals worldwide.

Glencore Xstrata’s agricultural assets will include 270,000 hectares of leased/owned farmland.

Over 200 vessels owned, leased or commercially managed for the oil business.

Access to and ownership of many ports.

(With input from Matthew Allen in Zurich)