Over the course of the week, the FTSE 100 index has really struggled. It closed yesterday around 200 points lower than where it opened the week. This has been put down to rising inflation expectations, and the negative impact this would have on companies in the future. However, not all stocks have suffered. The Glencore Xstrata (LSE:GLEN) share price is actually up over 10% this week! So why is there such a divergence here?
Sustainable debt levels
First, let’s look at the main issue behind the FTSE 100 slump. If inflation does start to rise, it will likely force the Bank of England to raise interest rates. This is because higher rates should suppress activity, as people have a larger reward for saving instead of spending. The other impact of higher rates is that it makes it more expensive for debt-laden companies to pay back the interest on loans. It also makes it more expensive to refinance or issue new debt.
This is a problem for companies with a lot of debt. So what about Glencore (and the share price)? The company has actually reduced net debt from 2019 to 2020. It was reduced from $17.5bn down to $15.8bn.
The net debt to adjusted EBITDA (a profit measurement) ratio for 2020 was between one and 1.5x. In short, the debt relative to earnings is at a sustainable level. So one reason that the Glencore share price is up this week is because this concern around inflation isn’t too relevant for the company. Even if rates rise, Glencore is not overloaded with debt to be worried about.
Higher commodity prices
Another reason that the Glencore share price is rallying this week is due to commodity prices moving higher. Two in particular are copper and iron ore.
Glencore is one of the largest producers of copper in the world. Not only this, but it also forecasts higher demand going forward. In its 2020 report, it noted that “widespread adoption of renewable energy sources as a means of decarbonising energy supply will create significant new demand for the current enabling commodities, including copper”.
This week, the copper price has jumped to fresh all-time highs. Several large banks have already come out and said that they think the price could move higher still. So if Glencore is a large producer of copper, and copper is rising in value, this is a clear win. Hence, the Glencore share price has moved higher.
The price of iron ore also rose 10% to a record high of $226 per ton. Although iron ore is a small part of Glencore’s operations, the sentiment of such a large price rise was a positive.
The outlook for the Glencore share price
I personally think the outlook is positive going forward, and am considering buying some of the shares. The above details I’ve mentioned are all positive for the Glencore share price.
However, even my bullish reasons could be turned into risks. For example, the sensitivity of company’s performance to commodity prices could be seen as a bad thing. It’s a factor out of the control of the business, and so if prices fall then it will negatively impact Glencore.
Ultimately, I think this risk has to be accepted, but it doesn’t change my overall bullish view of the stock.
