Global commodities trader Glencore and mining company Xstrata have agreed a merger, estimated to be worth around $90bn, which could see an entire supply chain combined under one roof that could change the face of the commodities industry. Although it must first clear opposition from shareholders and regulatory hurdles, the merger would see Glencore Xstrata become a global powerhouse to rival the likes of Rio Tinto and BHP Billiton.
Glencore has long been strongly associated with a number of mining companies, not least the publicly traded Xstrata. Glencore has been reported to have owned between 30% and 40% of Xstrata stock as of 2011, while the company also holds stakes in Century Aluminium, Minara Resources and United Company Rusal.
Coal: potentially world's largest exporter
In 2006, Xstrata acquired Glencore’s stake in Carbones del Cerrejón, the largest coal mining operation in Latin America.
Should the merger be confirmed, the new group would become the world's largest exporter of coal. Xstrata, already the world's largest exporter of thermal coal, is likely to make great use of Glencore's expansive trading and logistics businesses. Glencore would, in exchange, secure a major supplier of commodities including Xstrata's reportedly vast reserves of coal.
Zinc: potentially world's largest producer
Xstrata purchased MIM Holdings, operators of Mount Isa, in 2003.
Any subsequent merged company would also become the world's largest producer of zinc, courtesy of Glencore's multiple zinc assets and subsidiaries, as well as Xstrata's interests in the metal.
Xstrata's portfolio of coal, copper, nickel and zinc will align well with Glencore's existing portfolio of mineral mining subsidiaries, but Glencore's other core businesses could allow a far simpler transition through vertical integration. The merger would become the first such integration between a mining company and commodity trader.
Copper: vast reserves
CSA underground copper mine is operated by Cobar Management (CMPL), the Australian subsidiary of Glencore International.
Xstrata is rumoured to have vast reserves of copper from its mining operations and acquisitions of MIM Holdings in 2003 and Falconbridge Limited in 2006. Glencore shares an interest in copper with multiple subsidiaries in Africa, Asia and Australia. Any merger would result in a strengthened position within the market, allowing Xstrata to exploit Glencore's marketing channels.
Iron ore assets
The Zanaga iron ore project is owned by Jumelles, a subsidiary of Xstrata and Zanaga Iron Ore Company (ZIOC).
Although Glencore Xstrata's portfolio of commodities would be boastful, there is a distinct lack of iron ore assets. Xstrata chief executive Mick Davis has been acquiring iron ore assets in Africa during the last two years and, with rivals Rio Tinto, BHP Billiton and Vale all developing iron ore assets in Africa, the company could make use of its increased leverage to move into the iron ore market with significant financial muscle.
Future merger forecasts
Although both Glencore and Xstrata expect the deal to be approved by competition authorities, it has sparked criticism by potentially allowing Glencore Xstrata to control the prices of commodities through its control of the entire supply chain.
Vertical integration of this level, while exceedingly problematic and controversial, would see the newly-formed company boast significant savings in costs through synergies, while analysts have predicted the merger could save as much as $500m in the first full year of trading alone, mainly through marketing.
The company would also benefit from far greater leverage to borrow finance, a significant advantage over other companies in the commodities business which demands high-volumes but provides low-margins in exchange.
More importantly, it could see the merged company launch a challenge towards other major mining companies, such as Rio Tinto and the world's largest mining company BHP Billiton, forcing them to consider a similar model of integration or expansion in order to compete with Glencore Xstrata. Although this potential deal is the first such vertical integration to include both a mining company and commodities trader, significant success would ensure it's not to be the last.