Indeed, year to date Glencore and Standards shares have slumped 52% and 23% respectively, as profits have slumped, and the costly mistakes of the past have come back to haunt the companies.
For example, Glencore announced a $790m write-down alongside a 56% fall in profits when it released its results earlier this month. A few weeks before Standard announced a drop in first-half pre-tax profit, a jump in impairment charges for bad loans and cut its dividend.
Unfortunately, these trends could continue and the two companies shares could fall further before they begin to turnaround.
The health of Chinas economy is the biggest concern for the majority of City analysts right now, but, in the words of Glencores CEO Ivan Glasenberg:
At the moment none of us can read ChinaNone of us know what is going on there and Im yet to find the guy who can predict China correctly. China in the first half was a lot weaker than anyone expected.
Both Standard and Glencores futures depend on the health of Chinas economy. Standard is particularly reliant on the health of Asias largest economy.
British-based banks are the largestforeign lenders in China, with a total of $221.2bnoutstanding loans to China, which is more than double the volume of loans made by US banks.During the past year, the number of Standards outstanding loans to entities based in China expanded by 30%.
Also,around a fifth of Standards loan book islinked, directly and indirectly, to the commodity market around $61bn in dollar terms, roughly 140% of the banks tangible net worth.
That said, the banks management is working hard to reduce the groups direct exposure to the commodity market. Direct exposure has declined 11% since the end of 2014.
Still, theres no escaping the fact that any prolonged Chines economic slowdown will hit Standard hard. Not only will the group suffer as loans to Chinese customers turn bad, the company will also feel the effect of falling commodity prices, which are under pressure due to declining Chinese demand.
Like Standard, Glencore is suffering as Chinas demand for raw materials slows and commodity prices slide. The price of coal and copper, Glencores two main commodities, has plunged to multi-year lows this year, and it doesnt look as if prices will mount a recovery anytime soon.
Glencore has responded by slashing capital spending.Capex this year will be cut to $6bn and $5bn in 2016. However, the group has a $29.5bn debt pile to contend with many of Glencores mines have higher production coststhose of mining titans BHP and Rio, both of which produce a similar range of commodities.
Still, while the future doesnt look bright for Glencore, if youre willing to take the risk, the companys shares currently tradeat 0.7 timesbook value. Glencores projected dividend yield is 8.3%, the highest in the mining sector.
I strongly recommend that you researchGlencoreyourself before making a trading decision — you may come to a different conclusion.
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