Those tax dodging bastards at Glencore!

Ritchie tells us that they\’re dodging tax in Zambia.

Now I\’m actually willing to believe pretty much anything at all about Glencore. Personal experience in the metals game plus the delightful long term record of Marc Rich, the founder (although he sold out of it yonks ago).

However, I\’m not entirely sure about this report.

Take two points they make in their Mopani audit.

The first is about copper pricing. In the last two or three years the price received by Mopani, after the copper has been marketed by Glencore, has been progressively deteriorating below the LME price. The assumption the report makes is that this is deliberate, through the use of hedging (ie, sell futures).

How they get to that \”deliberate\” is interesting. They assume that if you were trying to hedge, to lock in high prices, then you would do so at the peak of the price cycle. However, if you were trying to shift cash out of a tax jurisdiction, you would do so at low prices. As the hedging seems to have been done at lowish prices, thus they might be hedging to tax dodge.

They might be.

However, there\’s another possible explanation: they got their hedging wrong. The divergence starts as copper prices start to roar up back in 2004 ish. So if Glencore (or Mopani) were hedging 3-6 months ahead, something not unusual as you might try to fix the price you\’re going to get for the copper cathode before you send the boys in with shovels to get the copper concentrate, then you\’re always going to be getting less than the current price. You\’ve sold it forward, recall? At today\’s price plus whatever futures premium there is (and this could get worse if there\’s no such premium, umm, I think that\’s called a cotango) but by the time you actually deliver the cash price has risen above your future price.

I\’d note that I\’m just going on what\’s in the report: I\’ve no extra information here. I\’d, as I say, believe pretty much anything about Glencore but it\’s not open and shut that they are tax dodging on this.

The second is about cobalt pricing. The report notes that the price Mopani receives is always below the LME price. Consistently below the LME price.

Well, yes, it might well be. For the purity of the Mopani Co is lower than some other suppliers (and higher than some others as well). The \”LME price\” is actually an average of the prices of the different suppliers\’ grades. I don\’t know whether Mopani normally trades at a discount or premium to LME, but it will do one or the other consistently. It\’s entirely usual for there to be a persistent premium or discount on all LME metals from specific suppliers as a result of those different suppliers having different purity levels. Russian A7 E for example (LME registered aluminium brand) a decade back went for LME minus $20 -$30 a tonne for example. Phoning up an LME broker in cobalt and asking what the premium/discount on Mopani is would sort this out pretty quickly….but we leave that as an exercise for the reader.

Just to repeat, I\’ve no idea what Glencore/Mopani is actually doing. But these two points don\’t seem to me to be open and shut cases that they\’re doing something naughty.

4 thoughts on “Those tax dodging bastards at Glencore!”

  1. But that is the point with Mr. Murphy.

    Always, always, assume the worst case scenario.

    Never investigate. They must be tax-dodging bastards. There may be another simple or evencomplex explanation, but let’s not check it out (or even think that it might exist).

    It’s more fun that way and a damn sight easier. Certainly makes me feel like a saint too.

    Not putting my hand in the fire for them either, but …

  2. What I don’t get is what this proves. This is metals trading. Relating to Zambia.

    How does anyone not have factored the “tax fudge” factor in already? You more or expect peccadilloes of this sort.

  3. If spot is above the price of your futures contract, you’re in backwardation. Spot below price, which is where you want to be, is contango.

  4. Glencore. Right royal pain in the arse.

    At least Tim doesn’t have to work with the bastards.

    Over at their offices in Zug/Baar next month being used as a floorcloth just because they are “Glencore” (TM) “Feel the Love”.


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