The Secret Club That Runs the World: Inside the Fraternity of Commodity Traders (18 page)

When nobody took Goldman up on its offer, the whole outcry looked like a bluff. Armed with a list of ideas for improving the LME system,
Cohn hurriedly booked a television interview and went on CNBC to discuss the matter. “We feel horrible for consumers if they can’t get the metal,” he explained. “We don’t believe that to be the fact.” Despite the firm’s offer to provide immediate aluminum to users who needed it, “not a single person” had taken Goldman up on the idea, Cohn noted.

The following month, Goldman and the LME were sued for violating U.S. antitrust laws in the Detroit warehouses. A parallel
Justice Department inquiry was soon under way.

G
oldman Sachs, as it turned out, was much more than just a commodity trader. It also advised some of its competitors in the business about raising cash through the bond and stock markets and undertaking mergers and acquisitions as part of its investment-banking business.

Glencore was not an advisory client. Nonetheless, in September 2011, a Goldman banker named Brett Olsher found himself playing armchair psychiatrist to an unhappy Ivan Glasenberg at a sushi restaurant in London.

Glencore had just undertaken its IPO in May, and now a mining CEO whose company Glasenberg wanted to buy was reluctant to talk seriously about a merger. “We’ve taken the company public,” Glasenberg told Olsher in his somewhat nasal South African English. “We’ve done everything he wanted.” Yet Glasenberg admitted he wasn’t confident that he could convince Mick Davis, the head of Xstrata, to negotiate in earnest.

Olsher listened intently. The tall, nattily dressed financier had spent the last fifteen years in London advising mining companies.
Two and a half years before, he had worked on a controversial cash-raising deal for Davis in the thick of the 2008 financial crisis.

Arguably, it was awkward for Olsher to be holding a merger conversation, however preliminary, with his client’s expected buyer. But Olsher, who was once dubbed the “
man of steel” by a London newspaper for his knowledge of the metals business, prided himself on maintaining a good rapport with executives like Glasenberg, even if he often sat on the opposite side of the bargaining table.

“It’s going to get done,” Olsher said reassuringly. Davis, he added, was ready to talk to Glasenberg about a combination at some point.
“I think it needs a year, though,” Olsher added. After all, the Glencore IPO, which had established a public currency, or valuation, for the company for the very first time, was still very recent.

“I don’t believe you,” Glasenberg said.

It was a rare impasse for the indefatigable CEO. To Glasenberg, every day was groundhog day, as one associate put it: a new opportunity to make a trade. Known for his rigorous exercise regimen and round-the-clock travel, Glasenberg was routine-bound, tactical, and usually got his way.

But the year—in fact, the decade—had not played out quite the way he’d expected. There had been multiple failed attempts to woo Mick Davis, starting as early as 2001 and happening again as recently as Glencore’s IPO preparations. In between, there had been the near-death experience of the 2008 financial crisis and the decision to go public in hopes of bringing greater stability to the company.

Those things had worked out well enough. But the fifty-four-year-old Glasenberg was weary of the constant reinvention that running a commodity trader required. Every January, he complained to
associates, he had put on his figurative accountant’s visor and started from scratch, trying to figure out how Glencore would make profitable transactions in the new year. He believed that until the company owned more industrial assets, like mines and processing centers, that created more consistent revenue, the firm would again and again face that cumbersome perennial challenge.

Some insiders had an additional theory: that Glasenberg wanted to see Glencore rank among the top-tier commodity and metal players, alongside $100 billion companies like BHP Billiton and Rio Tinto. (Glasenberg scoffed at the idea, preferring to play the greed card rather than admit to corporate vanity; as a huge shareholder himself, he’d say, the only thing he cared about was having fat returns.) Glencore had plenty of marketing expertise and a small but respectable beachhead in the physical mining, storage, handling, and drilling of raw materials. Until it increased its global presence with a transformational deal like an Xstrata merger, however, the top tier would be out of reach.

Glencore had gone public on May 19, 2011, just weeks after Andurand lost hundreds of millions in the Brent crude market drop. The market’s initial reaction to Marc Rich’s former company was modest, with the stock trading up only a few points in the first few days amid light trading. Still, the stock’s debut had at least one of its shareholders’ desired effects: making billionaires of Glasenberg, Alex Beard, and several others, and valuing the company itself at an impressive $59 billion.

The IPO also unlocked almost four decades of secrecy. Glencore’s sixteen-hundred-page prospectus revealed a heft in certain commodities larger than some market participants had ever
guessed. By its own estimates (exact figures on the market share of other players to compare to were impossible to come by), it was one of the world’s largest players in crude oil and refined products, the very largest in the business of seaborne steam coal, and one of the biggest producers of sugar. In the trading of metals and minerals, it was equally fearsome, handling nearly a quarter of the market for cobalt, 14 percent of the market for nickel, and 13 percent of the market for zinc. Glencore operated fifty offices in more than forty countries, which were depicted on colorful maps.

Glencore’s numbers were impressive too. For the prior year, it reported overall revenue of nearly $150 billion—nearly four times what Goldman Sachs had generated and about 40 percent of what the far larger energy company ExxonMobil made—and a net income of $1.6 billion. Its assets, or properties of value, both tangible and otherwise, amounted to $80 billion—considerably less than a typical oil major or a large depositor, but twice the size of a large futures broker like MF Global and plenty big enough to qualify as a systemically important entity under Dodd-Frank.

It was also a company laden with liabilities, both financial and legal. Prominent on the list of “risk factors” was Glencore’s exposure to “fraud and corruption due to the nature,” the documents stated, of its “business and operations.” Glencore had long been the target of human-rights activists, who accused it of a wide range of corrupt practices, from bribery and tax dodges to hatching backroom deals with violent dictators. Glencore denied most of the assertions, brushing them off as the critiques of nongovernmental agencies that still associated the company with Marc Rich—a figure that many of the younger generation, even within the company, unapologetically considered to be a sleazeball. Nonetheless, headline damage was a constant threat.

During his pre-offering roadshow, Glasenberg was struck by how little investors knew about his company. Coiffed, trim, and reserved-looking in his pressed suit and conservative tie, he was more approachable than many money managers had expected, and his company’s story often surprised them. Many regarded Glencore as a high-tech gambler that considered the world’s raw materials mere chips on the table. Glasenberg tried to assure them that his company traded real, physical assets and used commodity contracts only as a hedge on short-term exposure. He likened Glencore to a logistics company such as FedEx or DHL.

Two of the investors intrigued by his pitch were Sheikh Hamad bin Jassim bin Jaber Al Thani
and his deputy, Ahmad al-Sayed,
who ran the Qatar Investment Authority, an $80 billion state-run investment piggy bank known on Wall Street as a “sovereign-wealth fund.” Having made investments in a number of luxury brands and high-end buildings in London, Qatar was looking for new opportunities in the commodity sector, where it was rich in natural gas but little else. Thinking Glencore could be the logical next step, Al Thani considered a major preoffering investment. However, he wanted a discount, and Glasenberg, noting that providing IPO discounts to cornerstone investors was against stock-exchange regulations, had to tell the sheikh that a discount would not be possible.

In the normal course of business, Glasenberg and Davis had always spoken at least twice a month. Glencore did considerable marketing work for Xstrata, including transporting and selling about a third of Xstrata’s products, among them most of its nickel and cobalt. Glencore also advised Xstrata on its coal and copper
marketing. On one of their regular phone calls not long after the Glencore IPO, Glasenberg raised the merger idea anew.

“Mick, you’ve got to start talking again,” he said. “Let’s talk.”

Davis hesitated. Generally he and Glasenberg got along fine. But doing a deal together was a totally different matter—and, in Davis’s experience, an extremely unpleasant one.

The Xstrata chief had first run across Glasenberg in college in Johannesburg, where Davis, then a lecturer, had taught some of Glasenberg’s friends. In 2001, the two reconnected when Glencore recruited Davis to run Xstrata, the renamed version of a small mining entity then in its portfolio. The job was a step down for Davis, who had been the chief financial officer of the huge miner Billiton
before its $28 billion merger with BHP. But he had been passed over for the top position at the merged company, and spotted an opportunity in Xstrata. His new business went public in 2002, leaving Glencore, which had entrusted it with some lucrative coal assets, with its one-third stake.

In the years that followed, Xstrata made some forty different acquisitions, including the purchase of Mount Isa Mines (MIM), a copper and zinc operation in Queensland, Australia, and the Canadian nickel miner Falconbridge. Largely on the success of those deals, its share price rose dramatically, pleasing both its public and private shareholders. Suddenly Davis, who had undertaken the MIM deal above some Glencore objections, looked like a deal-making genius.

In 2007, Glasenberg approached Davis about combining their two companies, but their talks failed to generate anything. The executives couldn’t agree on a price for the deal, and Xstrata’s other shareholders were cool to the idea. Afterward, Xstrata’s buying spree continued, this time around with less obvious success.

Xstrata management continued thinking about its corporate future. In 2008 the company was approached by the Brazilian mining giant
Vale about a purchase, valuing it at $85 billion—a deal that could have produced a 1,400 percent return for Xstrata’s original shareholders and made Davis and his lieutenants phenomenally wealthy. But Glencore, whose approval was crucial, objected.

Two and a half years later, Davis was still stewing over the lost opportunity. He was convinced Glasenberg had crushed the Vale deal at least partly out of spite—not that Glasenberg, who maintained that Vale’s chief had never made a serious offer for Xstrata, particularly cared. Reputation was important to Davis, perhaps more so than for Glasenberg, who knew that many associates considered him and his team to be a bunch of hard-driving bullies. A father of three and an observant Jew, Davis had other interests apart from mining and metals. He devoted a good deal of his free time to religious philanthropy in London, where he chaired the United Jewish Israel Appeal of Great Britain (Glasenberg was also an observant Jew). A large, paternal-looking man, sometimes referred to as “Big Mick,” Davis believed in taking extended holidays and traveled often to his homes in Israel and Cape Town, where he often spent parts of December and January. A passionate fan of the game of cricket, he had once spent three hours explaining its inner workings to Brett Olsher on a long plane ride, sketching its structure on a pad as he spoke. Nevertheless, he was known for his middle-of-the-night e-mails and his blunt approach to work.

Reluctant as Davis was to rekindle merger talks, he faced few options. Glasenberg, he knew, would never sell Glencore’s stake back to Xstrata. And given what had happened with Vale, a third-party takeover was also unlikely. So Davis effectively had two
alternatives: he could continue with the uneasy alliance that Xstrata and Glencore already had, but with Glencore now public and competing for the very mining assets Xstrata might want to buy; or he could try to work out a deal to combine more comfortably with Glencore.

“Mick,” says a longtime associate, “is a very black-and-white guy.” He “fast-forwards to the end, and then he works his way back from that as to what are the items on the critical path.” So when Glasenberg suggested a meeting with an investment banker named Michael Klein as a way of initiating some shuttle diplomacy, Davis agreed.

Klein had an appropriate CV for the role. Not only had he worked with numerous well-heeled investors, including
private-equity firms and the sovereign-wealth fund in Abu Dhabi, a sister city to Dubai in the United Arab Emirates, but he had also
advised the UK on its financial-crisis bailouts and, as a senior executive at Citigroup, had
helped keep its corporate culture smooth in the aftermath of mergers there.