New York, 3 February 2012

Platts: US and European ferroalloys traders said Thursday they did not think a merger between commodity trading group Glencore and diversified miner Xstrata would make any difference to the way Xstrata's materials were marketed.

Earlier Thursday, Xstrata confirmed that it had been approached by Glencore and that the two companies were in merger talks. Both companies said there was no certainty that the talks would lead to a bid being made.

Both companies have their primary listings on the London Stock Exchange and under the rules of the exchange, Glencore has until close of business on March 1 to make a bid, or announce that it has no intention of doing so at that point. An extension of the deadline can be requested. If Glencore decides not to make a bid, it would be barred for six months for making a bid for Xstrata.

Glencore markets Xstrata's production of charge chrome, ferrovanadium, molybdenum, nickel and cobalt.

"It is a large concentration of power on paper, but I don't think it represents any more concentration of power than already exists," said a trader. "Glencore marketed Xstrata's production on so many commodities, so there's no real change. In all probability, the consumers of these commodities will still be dealing with the same people."

A European trader agreed, saying, "Glencore, as a matter of principal, generally doesn't sell to the trade, so it certainly makes no difference to me. I can't imagine that policy will change, and they will still be dealing with the same customers."

The first trader said that a merger would unlock some shareholder value. "Shareholders of the combined holding will receive the maximum benefit of the new entity marketing all of its own production, but doing it Glencore style, rather than the way many producers market their material, which is often at the lowest price," he said.

"At the moment, the existing shareholders of Xstrata don't realise that full value and the existing shareholders of Glencore realise some of that value. But combined, they will realise the full value of their production assets."

A second US trader said: "My understanding, from some of the people I know at Xstrata, is that there's always been a bit of resentment that Glencore gets to market all their material, so that might resolve that issue."

A merger of Glencore and Xstrata had long been speculated among traders and analysts, even before Glencore made its initial public offering on the London and Hong Kong stock exchanges last May, raising around $10 billion.

The first trader described the move as "inevitable," adding, "I think everyone assumed it was just a matter of time."

Shortly after the IPO, there was speculation in the British mainstream media that Glencore was considering bidding for Kazakh mining group Eurasia Natural Resources Corporation, also listed on the London Stock Exchange. But the speculation resulted in Glencore making a statement that it had no intention of making a bid, which barred it from pursuing ENRC for six months, unless a competing bid emerged.

The trader said that a merger of Glencore and Xstrata -- the world's largest charge chrome producer -- would make a bid for ENRC -- the largest high-carbon ferrochrome producer globally -- highly unlikely. "I think ENRC is off the hook now," he said. He said a combined Glencore and Xstrata and then ENRC would present serious anti-trust hurdles in coal and ferrochrome.

He said if the Xstrata/Glencore merger proceeded, the combined entity might seek other acquisitions in other areas. "I suspect a combined Glencore and Xstrata would set its sights on iron ore, including developing some of its own [assets].

He thought that Australian producer Fortescue might be a potential target, giving a combined Glencore and Xstrata a potential "front row seat in the seaborne iron ore market. I don't think BHP or Rio Tinto could touch Fortescue, or Vale, because that would raise insurmountable iron ore anti-trust hurdles all over the world. But Glencore-Xstrata wouldn't face those issues. The only bar might be the price tag," he said.

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