Not afraid of criticism - Glencore can cut production directly to push up the price of zinc

Abstract Ivan Glasenberg, Chief Executive Officer of Glencore PLC (0805.HK, GLNCY), said that by implementing a strategy that is both powerful and risky, Glencore has made a big difference. The strategy is to use Glencore...
Ivan Glasenberg, chief executive of Glencore PLC (0805.HK, GLNCY), said that by implementing a strategy that is both powerful and risky, Glencore has made a big splash. The strategy is to use Glencore in zinc. The dominant position in the market has led to a shortage of supply through production cuts, which in turn has pushed up zinc prices.
The Swiss-based miners and commodity traders announced in October 2015 that they would shut down 4% of the world's zinc capacity, causing zinc prices to soar by 7% that day. After that, zinc prices climbed 70% as demand exceeded supply, and this year's global commodity rises rose more than copper (15%) and aluminum (20%).
Glasenberg is unconcealed by Glencore's ability to rely on production cuts to influence market prices, which is completely different from the executives of other mining companies. Usually, if the market influence of a mining company is too large, it will inevitably be subject to outside criticism, so managers always avoid such issues.
But Glasenberg said frankly at last month's earnings call that when Glencore decided to cut zinc production, it was because of the benefits that the reduced output would bring to the rest of the production. The result was also zinc. The price is very favorable.
While zinc and other commodity prices are partly affected by Chinese demand, analysts say the fact that zinc prices are higher than other commodities highlights how much influence a company can have on the market. The situation is rare in the commodity market. Mining companies like Rio Tinto PLC and BHP Billiton Ltd. are opposed to cut production in order to raise prices. Rio Tinto and BHP Billiton have a large share of the iron ore market.
Glasenberg said in a conference call that the price of zinc fell to a very low level in 2015. In the long run, it is more reasonable not to exploit. He attributed the rise in zinc prices to China's demand and the company's active production cuts.
Analysts also share the same view. Vivienne Lloyd, a metals analyst at Macquarie Group, said the zinc price rebound was driven by Glencore's production cuts.
Glencore said that they succeeded because they combined the world's largest mining business with an experienced commodity trading department.
According to Macquarie's data, as the world's largest zinc mining company, Glencore's zinc production accounts for 8% of global zinc production, above Teck Resources Ltd. (TCK) and Vedanta Resources PLC, Teck Resources and Vedanta. Resources' zinc production accounts for 6% and 4% of global zinc production, respectively. According to data from Wood Mackenzie and other analysts, Glencore controls half of China's global zinc and zinc-smelting raw materials trade, in line with its public disclosure in 2011.
Higher zinc prices may lead to higher prices for automotive and construction steel. In the loosely regulated global zinc market, there are few rules that apply to managing a company's market share, except for some countries' anti-monopoly rules for M&A transactions.
International commodity traders and miners are often reluctant to cut production because they fear market share is being seized by competitors. Mining companies like BHP Billiton and Rio Tinto claim to be more focused on minimizing the cost of iron ore production, rather than pushing prices up by controlling production.
But Glencore can be different.
Zinc traders often compare Glencore to the Organization of the Petroleum Exporting Countries (OPEC). Just like OPEC in the 1970s and 1980s, Glencore controls the marginal supply, which means that the increase or decrease in production alone can cause oversupply or shortage of the entire market.
Macquarie analysts expect the current zinc market to have a supply gap of 500,000 tons per year, which is comparable to Glencore's 2015 production cuts.
Glencore has many ways to compensate for the loss of revenue from production cuts. The company said that regardless of the price of the commodity, its trade department can make a profit, thus making up for the loss of commodity prices.

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