Mining Merger of Glencore and Xstrata: The New 'Too Big to Fail' Behemoths

The financial press is abuzz with news that Glencore, the world’s largest commodities trader, and Xstrata, the world’s fourth-largest diversified miner, are in talks to merge to form a global mining powerhouse. The pending $88 billion merger of Glencore and Xstrata has major ramifications for the world economy and deserves the attention of consumers and environmental groups as well.

This union will give the mining behemoth control over a third of the global market for thermal coal, and make it the world’s largest producer of zinc. The merger has been long-anticipated, as it makes perfect sense from a business perspective. The marriage will allow Glencore’s trading and marketing arm to access a greater raw material base, and create a company with a vast ability for acquisitions. This news has sparked a rally in mining stocks as it could reshape the mining sector. Analysts are already anticipating the deal will set off a new round of consolidations in the industry and put mid-size mining companies under pressure.

However, the deal needs to be scrutinized in terms of value for society as well as the share-holder. This vertical integration of the global commodity supply chain of coal, zinc, copper and lead could prove to be at the expense of consumers, as this will allow the company to flex its considerable muscle in terms of pricing power.

The ubiquity of competition in a market economy is taken for granted by economists as the rational allocation of resources depends on competitive markets. One of the key tenets of capitalism is that competition keeps greed and incompetency in check and ensures efficient pricing. And yet, access to key natural resources is currently concentrated in the hands of a few mining behemoths. The industry is dominated by mining giants such as BHP Billiton and Rio Tinto (both of which have shocking environmental and human rights records) that are continuing to aggressively acquire smaller miners.

While this deal will no doubt attract global antitrust scrutiny, it is not expected to be a serious obstacle to the merger, as Glencore already owns a 34% stake in Xstrata (which was split out of Glencore a decade ago). Thus, some regulators already consider both companies a single entity when reviewing competition in commodities markets. Furthermore, both Glencore and Xstrata are known to be notoriously secretive. Glencore is reported to have 46% of its 46 subsidiaries incorporated in secrecy jurisdictions. This highlights the surprisingly light-handed global regulation of the physical markets.

At a time when the excessive power wielded by corporate giants and global banks is being angrily questioned by the public, this deal is a red flag. We have seen the consequences of the decline of discipline when businesses are considered too big to fail on Wall Street. Are we willing to risk testing this model when it comes to our limited natural resources?

It took a global financial crisis for financial markets to come under strong scrutiny and regulation; let’s not wait for a commodity crisis to regulate global physical markets. It’s time consumers and policymakers paid closer attention to the natural resource oligopoly. Arguments of sustainability and environmental protection will hold little sway when the world’s natural capital is in the hands of a few.

Photo Credit: library of congress