Odd as that question sounds, it cuts to the heart of one of the boldest business deals of the past half-century, because merging minerals and food is what Xstrata and Glencore are proposing to do.
What becomes even more interesting is that while the chances of success in creating an “all resources” business are remote it is an experiment other mining companies will mimic, if only because small companies always follow the lead set by big companies – right, or wrong.
Creating “Glenstrata”, the name adopted in the media for the merged Glencore and Xstrata, is one of the issues watched carefully by Dryblower while spending the past few weeks in Europe at a truly momentous time in both politics and business.
Mining, naturally, has received little mention in the European media because it has become a small industry in a big region, but for an observer with a deep interest in the resources sector it has been possible to see first-hand the birth of a number of immensely important mining-related developments.
Glenstrata, a business which could become the world’s first fully-integrated food, mining and energy business, is one of those evolving changes. China, via its Hong Kong branch office, buying the London Metals Exchange is another, and the dramatic outflow of money from failing European countries is a third.
Not since 1989, when Dryblower was also in Europe to watch the fall of the Berlin Wall and the end of the Soviet Union, have so many dramatic events occurred at the same time, and like then what’s happening today will produce good and bad outcomes.
Shifting control of the LME into Chinese hands is probably the event being least watched, but it is an important step for the mining industry because it reflects another step in transferring minerals “pricing power” from the western world to the east.
No longer will a small group of “suits” poncing around the city of London determine some of the world’s most important metal prices in an archaic system that involves sitting around a “ring” swapping buy and sell quotes before popping off to the pub for a liquid lunch.
The LME under the control of Hong Kong Exchanges and Clearing will, over time, become more of a China-focussed business which reflects the fact that China consumes 40% of the world’s metals but accounts for just 20% of trading on the LME.
There is also the rather important fact that the Chinese Government is HKEx’s biggest shareholder and a Chinese Government bank is providing most of the funds for the $2.25 billion deal.
The flow of funds out of Europe has been the second big event of the past few weeks drowned out of wider media comment by political events in Greece, but for the mining industry the outflow is having a significant effect in currency values with the Australian currency rising back above parity with its US cousin.
As with the fall of the Soviet Union almost a quarter of a century ago the full impact of money flows underway today will not be known for some time. However, there is no doubt that a sea-change is underway with the flight of capital to safer destinations certain to affect future banking arrangements and currency values.
For miners it means a reduced need to include Europe on fund-raising road-shows, because the banks are broke, and a need to get a lot closer to US, Chinese, and even Australian banks because that’s where European capital is heading.
The third big change is the invention of the all-resources model in Glenstrata, a business which will integrate all facets of mining, food and energy, from producing the raw materials to refining, shipping and trading them.
In theory, it sounds possible because in some cases there are common customers and common financial arrangements. Chinese and Japanese trading houses, for example, already buy and sell everything.
In practice, the Glenstrata experiment will probably fail, largely because of the different corporate cultures in food and minerals, and the differences between producing raw materials and trading them.
However, if Glenstrata works and a new global resources giant has indeed been created, then other big companies will follow, if only to achieve the same economies of scale, and because customers and banks prefer dealing with a single supplier of bulk materials.
If there is a common theme running through the deals underway, and the money flows, it is contained in a single word: change.
The past few years of global uncertainty and rolling financial crises have unleashed a process of dramatic change, and the next few months will see whether the changes are good, or bad.
Hold on tight. We’re heading into interesting times (again).
This article first appeared in ILN's sister publication MiningNews.net.
