By Alexander Kozul-Wright
Alexander Kozul-Wright is a consultant for the Third World Network (TWN) based in Penang, Malaysia.
GENEVA (IDN) — At the end of October, Glencore—the world’s largest commodities trader—revealed that core earnings were on course to top $3.2bn, eclipsing the company’s guidance expectations. For context, last year’s trading profits of US $3bn (before tax and interest) marked a record high.
In 2020, the Switzerland-based group took advantage of an unprecedented drop in oil prices to buy cheap barrels of crude and then sell them in futures markets for significant profits.
This year, commodity prices have surged on the back of strong demand for raw materials linked to the post-COVID-19 recovery. Recent energy shortages in Europe and China have also amplified price gains for natural gas and coal, which are used to generate electricity.
Glencore looks set to make a healthy return on a US$588 million acquisition of BHP and Anglo-American assets in Carrejon, a Colombian coal mine. It is also the world’s largest exporter of seaborne thermal coal, which soared to a record price above US$250 per tonne in September before falling back to roughly US$165, where it was trading on November 12.
While prices have dropped recently (coal and metals prices edged down last month as China moved to tackle its energy shortage), market moves in either direction present opportunities for commodity traders to exploit differences in price.
Lender of first resort
Starting in the 1970s, newly independent countries across the developing world began reclaiming control of their commodity exports in a wave of nationalisations. In the process, traders such as Glencore (founded in 1974) successfully positioned themselves as hard currency lenders to new governments with limited access to international capital markets.
Under Idriss Déby Itno, a self-stylized guerrilla general who seized power in a 1990 coup d’état, the Republic of Chad followed other politically brittle but resource rich African countries in requesting loans from Glencore in exchange for future oil supplies, known as prepayments. These types of financing arrangements often go unregulated.
The original loan, finalised in May 2013, was worth US$300 million. By the end of the year, the loan had doubled in size to US$600 million. In 2014, Déby borrowed an additional US$1.45 billion from Glencore and a consortium of the company’s bankers to purchase Chevron’s remaining stake in Chad’s oilfields.
Glencore maintained an amicable relationship with Déby while oil prices remained over US$100 a barrel. When the commodity ‘super cycle’ ground to a halt in 2015, however, tensions flared as prices tanked – crude fell to roughly US$35 by end-December of that year.
As oil prices collapsed, Chad’s worsening finances triggered an economic crisis. After protracted talks in 2015, Glencore agreed to restructure the loan in exchange for funds made available from budgetary cuts to healthcare, education and state salaries.
Following years of austerity, Déby asked for another revision to the lending terms, which Glencore eventually agreed to in 2018. The maturity of the loan was extended, a two-year grace period on principal payments was agreed, and the interest rate was lowered. Even at these more forgiving terms, however, Glencore remained Chad’s largest commercial creditor.
Back to the drawing board
In January 2021, Chad became the world’s first country to request a sovereign debt restructuring under the G20s ‘common framework’, designed to help countries manage their debt repayments in the wake of COVID-19. For Chad, the proposal came with a new US$560 million IMF lending program (slightly less than Glencore’s Colombian coal mine deal).
The common framework is premised on comparable debt treatment for public and private creditors. This is crucial, since money freed up from otherwise restructured public debt will be ringfenced from repaying private creditors and can be used to buy basic imports like food and vaccines.
Chad was already struggling with high debt burdens before COVID-19, which sent oil prices into a tailspin and slashed crude exports, making up roughly two-thirds of the country’s foreign earnings. Chad was also thrown into political turmoil in April following the battlefield death of President Déby.
In June, Chad’s largest bilateral lenders (including China) agreed to restructure their claims and back the IMF loan. Under the common framework, however, IMF program lending will be withheld until Chad can secure comparable terms from all of its creditors.
On October 15, a consortium of private lenders headed by Glencore sent a letter to the IMF stating that it had begun engaging with authorities in a “constructive and good faith manner”, following a request for talks.
In response, Chad’s Finance Minister, Tahir Hamid Nguilin, told Reuters that Chad “welcomes the good faith gesture of our [private lenders] to open discussions about the restructuring of our debt”. He added that Chad’s economic recovery depends on constructive talks.
Waiting game
The outcome of negotiations will be seen as a bellwether for countries (including Zambia and Ethiopia) currently enlisted in the common framework. Potential applicants will also be keeping an eye on proceedings in Chad.
A speedy resolution would require Glencore to reconcile its repayment expectations with the IMF’s view that Chad’s external debt burden is “unsustainable” and lower its demands accordingly. However, in its recent letter, Glencore noted that its 2015 and 2018 concessions need “to be taken into account”.
Glenore can afford to stonewall—it has oil securities collateralized against the loan. It will also argue that high oil prices (currently at US$82 per barrel) have improved Chad’s debt position. Still, the loan has become a thorn in the side of the trading giant. Though small compared to the size of the company, especially this year, the deal has attracted negative attention from campaigners who criticize such loans as predatory.
“Collateralised contracts are problematic for sovereign borrowers.” says Daniel Munevar, a senior policy and advocacy officer at Eurodad. “For Chad, the money-for-oil scheme almost certainly undermined authorities’ capacity to diversify their funding base. By promising Glencore direct recourse to the country’s main source of foreign exchange, the loan probably deterred other would-be investors.”
While limited recourse to funding may have handicapped Chad in 2013, Glencore’s outsized influence on upcoming negotiations should make coordination more, not less, straightforward. In effect, Chad has just one senior (or high priority) creditor to contend with.
By resisting more radical steps (passing laws, for instance, requiring companies under UK and US jurisdictions to publicly disclose loans made to governments), the G20 is pinning its faith on private companies to voluntarily provide debt relief to countries such as Chad. Time will tell whether confidence in Glencore’s sense of self-sacrifice is justified.
Meanwhile, chronic food shortages and malnutrition continue to beset Chad’s population, 40% of whom live in absolute poverty. At the same time, the pandemic has cast a shadow over Chad’s anaemic healthcare system, which has administered vaccines to less than 1% of its population—one of, if not the, lowest in the world. [IDN-InDepthNews – 14 November 2021]
Photo: Glencore heads a consortium of private lenders, which are negotiating loan restructuring among others with Chad. On its part, chronic food shortages and malnutrition continue to beset Chad’s population, 40% of whom live in absolute poverty. Collage of People of Chad. CC BY 2.0 and Glencore corporate name.
IDN is the flagship agency of the Non-profit International Press Syndicate.
Visit us on Facebook and Twitter.
We believe in the free flow of information. Republish our articles for free, online or in print, under Creative Commons Attribution 4.0 International, except for articles that are republished with permission.