If you're a commodities bull, you're not going to want to hear this. Seriously. OK, well don't say I didn't give you a chance to navigate away.
First, it was Goldman Sachs (NYSE: GS ) suggesting that clients close out certain commodities bets, including a basket containing oil, cotton, and soybeans, and individual positions on copper and platinum. Now it's a Glencore IPO.
For those who don't keep close tabs on the commodities world, the logical questions are, (a) "Who the heck is Glencore?" and (b) "Why is its IPO such a big deal?" In short, Glencore is a giant in the commodities trading world and a miner and commodity producer in its own right. Consider a few of the statistics the company offers up:
- It's the world's largest supplier of third-party-sourced commodities in the majority of the metals and minerals it markets.
- It's among the world's largest nonintegrated suppliers of crude oil and oil products.
- It's the world's largest participant in the supply of seaborne steam coal.
- It's one of the leading exporters of grain from Europe, the CIS, and Australia.
Looking at the financials, in 2010, Glencore's total revenue was $145 billion, and it pocketed $3.8 billion in profit.
But heck, you could just look at the sheer size of the IPO to get a feeling for how big of a deal the company is. The offering is expected to raise $10 billion at the midpoint; that would put the total company value somewhere in the $60 billion ballpark. For sake of comparison, Goldman's market cap is $85 billion while Morgan Stanley (NYSE: MS ) -- another major commodities trader and part of the banking team for the IPO -- clocks in at $40 billion.
As far as IPOs go, it's an even bigger splash. Going back to the beginning of 2006, there are only a handful of IPOs that rank up there with the $10 billion Glencore is likely to raise.
- 2006: Industrial and Commercial Bank of China ($19 billion) and Bank of China ($10 billion).
- 2008: Visa (NYSE: V ) ($18 billion).
- 2010: Agricultural Bank of China ($21 billion), General Motors ($20 billion), AIA Group ($21 billion).
Glencore is among some pretty serious company.
Connect the dots
Why does all of this mean that commodities could be topping out? In a word: timing.
In coverage of its IPO, Glencore has drawn comparisons to Goldman Sachs. The size is somewhat similar, it's got a hefty trading arm, and it's famously secretive. More importantly, just like Goldman, Glencore is -- to quote Good Will Hunting -- wicked smaht at what it does. Which means the company wouldn't be selling a $10 billion stake if the getting wasn't good.
In similar past situations, this kind of offering hasn't worked out so well for investors. Goldman conducted its IPO in mid-1999 amid the Internet-stock bubble. The stock closed at an adjusted $63 on the first day of trading and by the fall of 2000 had gone well over $100. But then the bubble burst and so did Goldman's shares; by 2003 they had fallen right back to basically where they had started four years prior.
More recently, in 2007, leveraged buyout kingpin Blackstone (NYSE: BX ) launched an IPO of its own as it was benefitting from a huge wave of gargantuan buyouts and an insatiable investor appetite for investing in LBO funds. Shares traded well above $30 after they hit the public markets, but soon crashed with the financial markets, hitting lows in the low-single digits in 2009. They've recovered significantly since then, but are still well below the IPO levels.
Of course, it wasn't just investors in the IPOs that should have paid attention to what was going on with Goldman and Blackstone. Not long after the Goldman IPO, the Internet bubble that was padding its bottom line burst. Not long after the Blackstone IPO, the debt bonanza that it was feasting on dried up and we ended up in a harrowing financial crisis.
To be sure, a crash in commodity prices might elicit more cheers than sobs from many -- just think about prices at the pump and the metals and materials that go into the goods we buy. However, investors who have plowed significant chunks of their portfolios into commodities and commodity-dependent companies -- think Freeport-McMoRan (NYSE: FCX ) , Cliffs Natural Resources (NYSE: CLF ) , or ConocoPhillips (NYSE: COP ) -- may want to think long and hard about what the sharp folks at Glencore are saying about the commodities market by conducting this massive offering.
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