The Secret World of Oil: The Traders: Glencore
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You can be the smartest trader in the world and you still can't make money without access to oil. Fortunately, there is always access if you are willing to pay enough cash. —Swiss commodity broker
When Glencore, the world's biggest commodities brokerage firm, went public in May 2011, the initial public offering (IPO) on the London and Hong Kong stock exchanges made headlines for weeks in the trade-industry press, which devoted endless columns to the company's astonishing valuation of nearly $60 billion—higher than Boeing or Ford Motor Company. The massive new wealth turned the nearly five hundred employees into overnight multimillionaires and made billionaires of at least five senior executives, including CEO Ivan Glasenberg. "We are not going to change the way we operate," vowed Glasenberg, who had started as a lowly coal trader for the Swiss firm nearly three decades earlier and, with the IPO, immediately became one of Europe 's richest men. "Being public will have absolutely no effect on the business."
Going public forced the firm to pull back the curtain on its famously secretive doings, and what it revealed shocked even seasoned commodities traders. Glencore turned out to be far more globally dominant than analysts had realized. According to its 1,637-page IPO prospectus: the company controlled more than half the international tradable market in zinc and copper and about a third of the world's seaborne coal; was one of the world's largest grain exporters, with about 9 percent of the global market; and handled 3 percent of daily global oil consumption for customers ranging from state-owned energy companies in Brazil and India to American multinationals such as ExxonMobil and Chevron. All of which, the prospectus said, helped the firm post revenues of $186 billion in 2011 and employ some fifty-five thousand people in at least forty countries, generating an average return on equity of 38 percent, about three times higher than that of the gold-standard investment bank Goldman Sachs in 2010.
Since the IPO, the company has only gotten vaster in scale by making a series of acquisitions, among them a merger with Canada's biggest grain trader, Viterra, and a $90 billion takeover of Xstrata, a global mining giant in which it already held a 34 percent stake. Thanks to the latter deal Glencore will rule over an "empire stretching from the Sahara to South Africa," as Africa Confidential put it. As it is, Glencore already trades, manufactures, refines, ships, or stores at least ninety commodities in some three dozen countries.
Glencore 's physical presence in the United States is modest; it has minor holdings in a few American companies and an office in Stamford, Connecticut, that helps run its oil and gas trading business. But its global market power and reach make its operations important to American policy makers as well as to the public. "Wherever you turn in the world of commodities, you bump into Glencore," says Nicholas Shaxson, author of Treasure Islands, a book about tax havens and an associate fellow at the British think tank Chatham House. "It is twice as big as Koch Industries, and it has an unhealthy grip on some of the world 's most important commodity markets, with influence that stretches from Texas to Tehran to Taipei."
Peter Brandt, a longtime commodities trader, echoes that assessment. "Glencore is at the center of the raw material world," he told me. "Within this world there are giants, and Glencore is becoming a giant among giants." China's manufacturing base, one of the world's economic engines, "could not exist without Glencore, because it is dependent on raw material imports, many of which Glencore plays a major role in trading and producing," he added.
If the IPO shed light on Glencore's assets and influence, it did not make clear just how Glencore, founded four decades ago by Marc Rich, a defiant friend of dictators and spies who later became one of the world's richest fugitives, achieved this kind of global dominance. The answer is at once simpler and far more complicated than it appears. Like all traders, it makes its money at the margins, but Glencore, even more so than its competitors, profits by working in the globe's most marginal business regions and often at the margins of what is legal.
This means: operating in countries where many multinationals fear to tread; building walls made of shell corporations, complex partnerships, and offshore accounts to obscure transactions; and working with shady intermediaries who help the company gain access to resources and curry favor with the corrupt, resource-rich regimes that have made Glencore so fabulously wealthy. "We conduct whatever due diligence is appropriate in each situation to ensure we operate in line with Glencore Corporate Practice," was spokesman Simon Buerk's terse reply when I asked how the firm chooses business partners and local representatives.
Given the nature of its business, there's simply no other way for a company like Glencore to thrive. "Unlike the case with many industries, minerals and energy are often owned by the state in Third World countries," says Michael Ross, author of The Oil Curse and a professor at the University of California, Los Angeles. "And in a number of coun- tries where Glencore operates, doing business means putting money into the pockets of repressive governments and corrupt rulers. In some of those places ... it's hard to draw a line between what's legally corrupt and what's not." Traders like Glencore—which Reuters once called "the biggest company you never heard of "—are largely invisible to the public. One obvious reason is that, with the exception of post-IPO Glencore, all the big traders are privately held and not subject to corporate disclosure laws. Another is that energy companies that produce oil, like ExxonMobil and Shell, also sell it at the corner gas station. Consumers don't have that sort of interaction with trading companies, so they get less scrutiny.
Furthermore, oil traders are not obliged to disclose the amounts they trade, and the firms operate under different names and affiliates. Jack Blum, an attorney and former Senate counsel who played a key role in investigations into Bank of Credit and Commerce International (BCCI), said regulating hedge funds would be easier than keeping tabs on traders. "They operate through a maze of subsidiaries, and it's virtually impossible to know who they are trading with and how much and at what prices," he told me.
Glencore's effective global tax rate for 2010 was just 9.3 percent, in large part because nearly half its forty-six subsidiaries are incorporated in "secrecy jurisdictions," opaque financial havens like the Netherlands, according to a report by the nongovernmental organization (NGO) Publish What You Pay. Glencore 's Rotterdam-registered Finges Investment is worth $18 billion, but doesn't have a single employee, according to corporate records filed in the Netherlands. Finges, a Dutch financial expert told me, is "nothing more than a piece of financial engineering."
When it comes to the media, oil traders consciously seek to stay out of the public spotlight. Sylvain Besson of Le Temps, a major daily newspaper in Geneva, describes a "culture of discretion" that prevails across the industry. "It's a hard world to penetrate," he said. "Banks will take very public stands, but not traders. It is the most discreet profession, and we have many discreet professions. They prefer we not write about them." Glencore in particular is known for its incredibly secretive corporate culture. One source compared the company to the CIA. Another said, "It's like a church. They buy loyalties; no one ever talks."
Traders have enormous political power, and because they are less regulated and scrutinized are able to do things that most energy-producing companies wouldn't dare. In 2007, Glencore effectively helped bankroll Ivory Coast strongman Laurent Gbagbo by discreetly providing his cash-strapped state oil company with an $80 million loan that was to be repaid with future exports. Gbagbo was overthrown four years later, at which point the loan had been renewed three times, and the state company, Petroci, still owed Glencore around 650,000 barrels that were worth about $70 million.
During the early stages of the 2011 revolt that drove Libya's Muammar Gaddafi from power, Vitol, one of Glencore 's chief competitors, secretly delivered (on credit) hundreds of millions of dollars worth of fuel to the opposition. The grateful rebels awarded Vitol the first contract to lift Libyan crude after the country resumed exporting oil following Gaddafi's overthrow.
Going public is unlikely to change the broad business model created and perfected by Rich, who, before his controversial pardon by US president Bill Clinton, was a legendary fugitive, a regular fixture (along with Osama bin Laden) on the FBI's Most Wanted list. The new Glencore will be like the Glencore of old—only much, much bigger. In today's superheated market for natural resources, driven by markets such as Brazil, China, and India, Glencore wants to grow—and in a major way. Already the world's biggest middleman, it now wants to control the entire business chain, from mines and smelters to storage facilities for finished products, and from pumping oil to shipping it to refineries, while trading and hedging all along the way.
Take copper, for example: Glencore mines it, refines it, transports it, and makes wire and other finished products. "That 's one way that Glencore makes so much money," a Geneva-based industry source told me. "When you are vertically integrated you make more at every step. The money stays in the same pocket."
Another way Glencore makes so much money is by leveraging information to take advantage of the wild swings that have marked global commodity prices in recent years, with oil yo-yoing from $147 a barrel in mid-2008 down to $40 later that year.1 Poor countries that sell commodities often end up losers when prices go down—like Zambia, which in recent years has been intermittently walloped by a combination of rising prices for agricultural products and sharply falling prices for copper and the other mineral exports on which it depends. But Glencore, like a casino where the house always wins, "benefits directly from the volatility," as Deutsche Bank noted cheerfully in a report issued prior to the IPO for potential investors.
Michael Masters, founder of both a global investment management firm and of Better Markets, a Washington DC–based group established to promote transparency in the financial markets, takes a far less rosy view. He described Glencore as an "active predatory force" that has an inordinate influence on the price of raw materials that are important to the US and global economy. "They are smart and good and know how to use information to exploit other investors," he told me. "When they're selling you don't want to be buying, and when they're buying you don't want to be selling."
Still, the real secret to Glencore 's success is operating in markets that scare off more risk-averse companies that fear running afoul of corporate governance laws in the United States and the European Union. In fact, those markets are precisely where the future of the company lies. Deutsche Bank identified Glencore's "key drivers" as: the growth of copper in the Democratic Republic of the Congo; coal in Colombia; oil and natural gas in Equatorial Guinea; and gold in Kazakhstan. All are places with a heady, dangerous mix of extraordinary natural wealth and various degrees of instability, violence, and strongman leaders. Glencore's experience and adeptness operating in these "frontier regions" and "challenging political jurisdictions"—Deutsche Bank's delicate euphemisms for countries known for corruption, autocracy, and human rights abuses—is central, the investment firm wrote, to Glencore's "significant growth potential."
The oil trading business—by which firms negotiate and purchase output from energy-producing nations, find buyers, arrange financing, and charter tankers to ship oil—didn't exist in its current form until after the 1973 Israeli-Arab war. Until then a few Western multinational companies dominated the oil business: They controlled the fields, the ships, and the refineries. Meanwhile, the United States and a handful of other industrial powers consumed 90 percent of exports, and so there existed a rough pipeline that moved global oil from the Third World to the First World. Daniel Yergin writes in his book The Quest:
Most of the global oil trade took place inside each of the integrated oil companies, among their various operating units ... Throughout this long journey, the oil remained largely within the borders of the company. This was what was meant by "integration." It was con- sidered the natural order of the business, the way the oil industry was to be managed.
The system broke up because producer companies got tired of bring ripped off by the multinationals and their home governments. One way they fought back was through the Organization of the Petroleum Exporting Countries (OPEC), which was founded in 1965 but only closely coordinated members' output to determine production after the Yom Kippur War. The conflict prompted OPEC to launch its embargo against the West, leading to an explosion in the price of oil. While the West viewed this as unfair collusion and political manipulation of oil prices, OPEC producers understandably saw it as a means of gaining a fairer share of the profits from the global energy business.
The emergence of independent trading also allowed producer countries to alter the balance of power. "The major companies were screwing the producer countries," a Geneva oil trader said. "They said, we're taking your oil, and we'll tell you what it's worth, and we'll refine it and sell it. But that all changed the day a trader turned up and said, I'll pay you twenty-one dollars instead of the twenty dollars they're paying you."
Oil trading proved to be hugely profitable, and before long the major companies had created their own trading wings. With the run up in global demand of the past few decades, the market has gotten far bigger and more lucrative. Glencore was valued at less than $1 billion in the mid-1990s, about one sixtieth of its value at the time of the IPO.2
Traders have flocked to Switzerland ever since the early days of the industry. The reasons for that choice are numerous, among them the country's long record as a financial haven that offers strict rules on bank and corporate secrecy and its weak business regulation. For years Swiss authorities did not prosecute bribery, and banks were not subject to money-laundering laws. Some rules have been tightened, but commodity traders and financial intermediaries are still largely unregulated. "It's a light touch here," one Swiss trader told me during a trip I made to the country in 2011.3 "There are rules, but they are not always applied."
For traders, another major advantage of operating in Switzerland has been the country's political neutrality and its reluctance to enforce international sanctions and embargoes. Swiss-based traders supplied oil to the South African apartheid state despite a UN embargo against Pretoria. Switzerland joined the UN in 2002, but is not a member of the European Union, and applies EU sanctions selectively. Ten years later Vitol bought fuel oil from Iran and offered it to Chinese buyers—and allegedly blended it with fuel oil from Europe to hide its origin—despite an EU embargo on oil trading with Iran. But Swiss-based firms could evade the embargo, because the government, citing unspecified "foreign policy reasons," rejected the ban.
Low corporate and personal taxes are another draw. Switzerland even offers special tax arrangements to attract rich individuals (and indirectly their companies) through a simple process known as the Forfait fiscal. The list of Forfait recipients and details of the individual deals are kept secret, but the total number of beneficiaries is public. Until a decade ago, about two thousand people had negotiated individual tax deals with Swiss authorities; by 2012 that number has climbed to about six thousand.
The names of a few recipients have leaked and include a number of big oil traders, such as Gennady Timchenko of Gunvor, a Russian firm with close ties to the Kremlin. Another person granted a Forfait was Chechen oligarch Bulat Chagaev, an intimate associate of ex-warlord and President Ramzan Kadyrov, who owns two Geneva-based firms, Dagmara Trading and Envergure Holding, which reportedly oversee his oil and gas trading, real estate, and construction empires. During an interview with Swiss national television, Chagaev declined to state the size of his fortune—"I don't know as I never count my money, nor that of others"—or to comment on allegations that he had purchased a major Swiss soccer team as a vehicle to launder money. "I don't know what clean or dirty money is," he said of the latter charge. "Money has no family name or country; it 's just money."
The political influence of the financial and trading sectors is also reassuring to commodity traders and other investors. "Creating favorable conditions to attract money from abroad is the basic strength of the whole Swiss system," says Besson of Le Temps. "Traders don't often take a highly visible political role—the banks are the most powerful visible lobby—but the political world is very sensitive to the broad needs of the offshore sector, including traders. Their influence is constant if not visible."
"It's a banana republic in extremis," says Oliver Classen, from the Berne Declaration, a NGO that tracks traders, of their political influence.
Geneva is now reckoned to have surpassed London as the world's biggest center for physical oil trading, and hundred of traders are based in or have major operations there. These include American corporate behemoths such as Cargill, state energy firms from Ukraine and Azerbaijan, and the trading houses of multinationals such as Total of France.
Independent traders are heavily represented in Switzerland as well. Vitol, which pled guilty for paying illegal commissions to Saddam Hussein's government under the United Nations oil-for-food program, also has a checkered past when it comes to hiring shady middlemen. In the mid-1990s the company paid Željko Ražnatović— better known as Arkan, the Serbian career criminal and paramilitary leader who the UN later indicted for crimes against humanity—$1 million to serve as a consultant on a deal in the former Yugoslavia.
During the huge energy price run-up in 2008, the Commodity Futures Trading Commission labeled Vitol a "speculator" that bought oil contracts to hold as investments instead of delivering fuel. At one point during the price spike Vitol held more than 10 percent of all oil contracts bought and sold on the New York Mercantile Exchange.
Frenchman Jean Claude Gandur founded Addax, another giant with offices in Geneva. Over the years it won various contracts in Africa and the Middle East by partnering with locals tied to ruling families and leaders. "In these parts of the world you are invariably going to be dealing with people connected to someone powerful in the ruling elite," Michael Ebsary, a firm executive, once explained. "That's just the way it is." Addax also has major interests in Iraqi Kurdistan, including oil fields and a refinery. In 2009, Sinopec of China bought Addax in a move seen as a sign of Beijing's ambitions to lock up its growing global energy needs.
Trafigura, one of many trading companies established by veterans of Marc Rich & Company, gained notoriety in 2006 for dumping toxic waste in the Ivory Coast (see p. 6). Through at least late 2011 Trafigura was selling fuel to Bashar al-Assad 's regime in Syria as it intensified a bloody crackdown on its opposition and the country lurched toward chaos and civil war.4
Gunvor of Russia, which swiftly grew to become the world's third-largest oil trader, was founded by its owners— Torbjörn Törnqvist and Gennady Timchenko—as a series of mailbox companies in the British Virgin Isles, Cyprus, and the Netherlands. They moved the firm to Geneva in 2003, the same year that the Russian government took over Yukos and tossed CEO Mikhail Khodorkovsky into jail. Gunvor took off after that; its rivals say the company has thrived due to favorable treatment from Vladimir Putin. International press reports have periodically suggested that Timchenko is a front for Putin...
Leveraging ties to dictators has always been at the heart of the business empire built by Rich, the Belgian-born US citizen who founded what would become Glencore in Switzerland in 1974. Undeniably brilliant, Rich started in 1954 as a mail clerk at Philipp Brothers, then the world 's dominant commodities firm, and within two years had worked his way into the position of junior trader. His own politics were conservative, but money trumped ideology for Rich; he was just as willing to cut deals in fascist Spain—where he worked for a time at the company's Madrid office, which specialized in handling business in rough countries in Africa and the Middle East—as in communist Cuba, where Philipp Brothers had dispatched him soon after Fidel Castro took power. He went on to travel frequently to Havana, where, in addition to picking up a lifelong fondness for Cohiba Cigars, he did business in pyrite, copper, and nickel.
He and Pincus "Pinky" Green left Philipp Brothers in 1974 and established Marc Rich & Co. in the canton of Zug, Switzerland's most business-friendly tax and secrecy haven. From early on, Rich cultivated ties to monarchs and presidents, diplomats and intelligence agencies, especially Iran's SAVAK under the shah. During the Arab oil embargo of the early 1970s Rich brokered a deal by which Iran secretly supplied Israel, which proved to be a vital economic lifeline.5 Rich also periodically lent a hand to the Mossad's clandestine operations, among them the evacuation of Ethiopian Jews to Israel in the 1980s.
Rich made a fortune by buying oil from Iran during the hostage crisis and from Libya when Ronald Reagan's administration imposed a trade embargo on Muammar Gaddafi's regime, as well as from supplying oil to apartheid South Africa. An inveterate sanctions-buster, Rich used offshore front companies and corporate cutouts to try to stay below the radar. He also pioneered the practice of commodity swaps, like the uranium-for-oil deals he brokered in the 1980s between apartheid South Africa and Iran. Such deals frequently caused him trouble with US authorities, and in 1983 Rich fled his home in New York to Switzerland just before the Justice Department issued an indictment against him and Green on charges of racketeering, illegal trading with Iran, and tax evasion. A House committee later described his business as "based largely on systematic bribes and kickbacks to corrupt local officials."
Still Rich continued to thrive, until he unsuccessfully tried to corner the global zinc market in 1992 and nearly bankrupted the firm with $172 million in losses, at which point he was forced out in a management buyout. The new directors renamed the company Glencore, reportedly short for Global Energy Commodities and Resources.
Rich's forced exit from Glencore and the US indictment hanging over his head had little impact on his business success. He created a new, independent firm and within a decade was trading 1.5 million barrels of oil a day, with an annual turnover of $30 billion. Then, in 2001, on Clinton's last day in office, the president granted Rich a controversial pardon6 stemming from the eighteen-year-old indictment; critics argued that the pardon was connected to the generous contributions that Rich's ex-wife, Denise, made to a variety of Democratic causes, including Hillary Clinton's successful 2000 Senate campaign and the Clinton presidential library fund. A number of prominent American Jews and Israelis, including then prime minister Ehud Barak and former Mossad director general Shabtai Shavit, also pressed the White House on Rich's behalf.
After his forced departure from Glencore Rich retired to a lavish estate, La Villa Rose, on the shores of Lake Lucerne, but his influence continued to be felt at the firm and throughout the industry (Rich died in 2013). Glasenberg, the company's CEO since 2002, got his start under Rich as a coal trader and, like the man who mentored him, was a quick study. By the late 1980s, just a few years after he was hired, he was managing the firm's China and Hong Kong offices and had become one of Rich's most trusted lieutenants. At least four other top Glencore executives at the time of the IPO had joined the firm in the Marc Rich era. They've preserved a workaholic ethic at the top of the company and—as a London law firm representing the company warned in a letter sent to major British news outlets soon after the IPO—consider themselves "extremely private individuals."
1 Volatility in 2012 was far less dramatic, but prices still ranged from a low of $90 per barrel to a high of $125, which by historical standards is still a lot of movement.
2 Of course, as Glencore grew it traded more and more commodities, but even at the time of the IPO, its oil trading division was the company's most profitable.
3 Like others, he would talk only on the condition that I not reveal his name.
4 International sanctions did not ban fuel sales to Damascus at the time, so they were not illegal, but they came amid calls by the US and some European governments for a boycott on energy deals with Syria.
5 Glencore continued to do business with Iran after the 1979 Islamic revolution, and in recent years has been a regular supplier of gasoline to the country. It halted deliveries in late 2009 under pressure from the US government.
6 Clinton pardoned Green as well. In 2009, Green lived in Jerusalem and had a fortune of $1.2 billion, according to Forbes magazine, which ranked him no. 601 on its annual list of the world’s richest people.