Glencore Xstrata: the view from China

As all eyes focus on the Glencore Xstrata deal announced on Tuesday, what does their biggest customer think about it?

China, a voracious consumer of commodities from iron ore to copper, is already Glencore’s biggest client and a major customer of Xstrata. If the merger goes through, the combined company would be the world’s fourth-largest miner by market value and the leading producer of zinc, lead and ferrochrome, according to FT estimates – and China would likely still be the combined company’s biggest market .

As traders and executives in China ponder what the merger of Glencore and Xstrata will mean for them, reactions have been across the board.

Some traders worry that the greater pricing power of the new combined company will negatively impact customers downstream. One staffer at Minmetals, China’s largest metals trader, expressed those concerns in a conversation with the 21st Century Business Herald, a Chinese paper:

A manager with Minmetals said that if the merger succeeds it will have a profound influence on the Chinese market and will even change the rules of the game because Glencore will be able to “develop its selling power in commodities.”

The person said that in the secretive world of commodity markets, Glencore has the ultimate say over nickel, aluminum and other metals. Meanwhile Xstrata will be able to use Glencore to obtain more raw materials for trade. Downstream smelting firms in copper, aluminum, steel and coal will see their market influence greatly weakened.

These concerns echo China’s vociferous complaints about the world’s “big three” iron ore miners – BHP Billiton, Rio Tinto and Vale of Brazil – who are routinely accused of monopolistic behaviour by Chinese industry bodies.

However, others seem quite pleased with the marriage of Glencore and Xstrata. Jia Mingxing, vice president of the China Nonferrous Metals Industry Association, a government-linked industry group, said on Tuesday he welcomed the tie-up.

“Mergers between overseas firms are quite normal, and domestic firms are also going through consolidation. An alliance between two strong companies is a good thing, and we are happy about that,” Jia said.

But a key question is whether China’s antitrust regulators will feel similarly. Although China’s ministry of commerce has never yet rejected a merger in the mining or resources sector, it has issued conditions for such deals before and its approach to mega commodities deals is relatively untested because China’s antimonopoly law is only four years old.

Additional reporting by Gwen Chen in Beijing.

Related reading:
Glencore and Xstrata agree $90bn deal, FT
Glencore and Xstrata turn to City dealmaker, FT
Guest post: Glencore/Xstrata global merger – a good deal for S Africa, beyondcrics
China blocks Vale’s large iron ore carriers, FT