Commodity stocks are generally highly cyclical, and Glencore (LSE:GLEN) shares are no exception. The FTSE 100 company, which trades and produces a variety of metals and minerals, has endured a 44% share price slump in the past 12 months.
There are pressing questions over the stock’s future trajectory as trade tensions cloud the global economic outlook. However, looking further back, the business has fared very well since commodity prices went into freefall during the early months of the pandemic.
Remarkably, £10,000 invested in Glencore shares five years ago would be worth a whopping £19,116 today.
The stock’s 91% rise from £1.39 to £2.66 today isn’t the full story either. Shareholders would also have received a chunky total of £6,996.91 in dividend payments. With passive income included, that equates to a marvellous profit of nearly £16,113.
But will the next five years be as lucrative for investors? I reckon it’s possible, but the route to get there is peppered with risks.
Hostage to fortune
Unusually among major mining firms, over half of Glencore’s industrial EBITDA comes from coal. Last year, over 95% of Glencore’s shareholders urged the company to scrap plans to divest its coal assets. The board listened and heeded the call.
That decision has had painful consequences, at least in the short term. Coal prices have plummeted since the huge spike following Russia’s invasion of Ukraine in 2022. A supply glut has hit the world markets as the world’s two largest consumers — China and India — ramp up domestic production.
Hence, the company’s adjusted EBITDA for FY24 fell 16% to $14.4bn. Further weakness in coal prices could continue to hurt the bottom line and, by extension, the Glencore share price.
Granted, the firm’s taking action by curbing thermal coal production at its Cerrejón mine in Colombia. Rather like OPEC turning off the taps to try to boost oil prices, the mining business hopes this will help to arrest the decline in coal prices.
But unfortunately I fear the company has limited control over this volatile commodity. Moreover, industrial raw materials, including coal, would probably suffer if the US-China trade war ends up causing a global recession. Glencore shares could be particularly vulnerable to this eventuality.
Reasons for optimism
Then again, volatility cuts both ways, as the post-invasion energy crisis showed. With global trading relationships up in the air and huge geopolitical uncertainty, there are plausible scenarios in which coal prices could make a quick recovery.
Over the longer term, Glencore remains bullish on fossil fuel with plans to expand coal production nearly 30% by 2050. Time will tell whether this strategy’s a sound one.
In any event, Glencore has many more strings to its bow. For instance, the marketing side of the business can thrive amid commodity volatility, which adds attractive diversification. This division’s adjusted EBITDA of $3.2bn in FY24 was at the top of the company’s long-term guidance range.
The commodities group also has significant exposure to key metals for electric vehicles (EVs) and the clean energy transition. These include copper in particular, but also nickel and zinc. The huge potential here shouldn’t be overlooked lightly.
For long-term investors who can stomach cyclical volatility, I think Glencore shares deserve serious consideration.
