European mutual fund managers sense an opportunity to drive down the price of Glencore International's bumper $11 billion listing, as fears of slowing global economic growth rattles commodity markets.
The Reuters-Jefferies CRB index, a benchmark for commodities prices, is on course for its biggest weekly plunge since July 2008 as Glencore's top brass begin a roadshow aimed at charming investors, some of whom remain skeptical about the Swiss trader's corporate governance and its motivations for listing.
Glencore, the world's largest diversified commodities trader, has already lined up buyers for all of the shares in its planned float. Part of that success is due to the relatively small stake in the company being placed with funds, and also due to Glencore's size, which makes is a must-buy for many.
My feeling is that if ... the rout we saw yesterday carries on in the next weeks before they are actually trading, these guys might be forced to come out again and revise this thing lower, a portfolio manager at a UK investment house said.
I'm not saying the demand is not there. It's just the intensity of that demand has moderated, he said.
The Reuters-Jefferies CRB index shed two-thirds of its 2011 gains on May 5, the day after Glencore set a 480-580 pence price range, a call it feels is modest enough to secure a positive start for its shares when they begin trading on May 24.
That range values Glencore at 36.5 billion pounds ($60 billion) at the mid-point, but the tumble in oil and precious metals prices has reminded investors of perils in commodities markets and further dented confidence in Glencore's valuation.
Although most said the falls were neither steep or unusual enough to derail Glencore's record-breaking IPO, seven of nine fund managers contacted by Reuters said the volatility had scuppered its chances of pricing above 520 pence.
Two of the nine managers suggested the company should even consider a new, lower price range to guarantee a positive stock market debut, while a third suggested investors were very likely to review or even reduce orders unless calm returned.
Although likely to be reasonably well-covered, I think they would like it to be successful post-event, one equities manager at a $100 billion funds firm said.
With weakening commodities seen recently, it is a good reminder that mining shares can go down as well as up, he said.
But analysts also say short-term volatility in commodity prices is good for Glencore, due to the company's reliance on its trading business, with marketing activities accounting for about 92 percent of Glencore's revenues last year. Volatility is better for trading profits than a steady market, though a long term drop could eventually hit Glencore's business.
The big picture positives are still there, it should list successfully, said Hong Kong-based Andy Mantel, managing director at fund manager Pacific Sun.
It's no big deal to me that commodity prices in the very short-term have corrected large amounts, he added.
The head of the oil and gas division at Lloyds Banking Group Andrew Moorfield said:
The impact on oil and gas traders will be minimal as they don't take price risk. They flourished during the 2008 oil price crash and will continue to flourish now.
Glencore hedges the vast majority of its commodity positions -- 98 percent by volume of commodities which go through its system are either forward-sold or hedged. The remaining two percent is made up of specialized commodities that cannot be hedged, those for which a perfect hedge does not exist, and only a small number of directional or naked positions.
Glencore does not engage in any material speculative trading activities, it said in this week's listing prospectus.
But the document also detailed a trading risk higher than that disclosed by investment banks, including Goldman Sachs.
During last year there was potential for Glencore to lose an average of $43 million a day in trading, calculated by a measure called value-at-risk (VaR).
The group has set a maximum limit of $100 million for VaR, which estimates potential losses as a result of movements in prices and other factors.
One UK-based fund manager at a house with more than $740 billion in assets under management said the risk of a dramatic correction in commodities was just one of several investment hazards he was uneasy about as he placed his order for shares.
I don't come to this with any huge enthusiasm and I don't really like the valuation. It just feels like the equity market is there to pick up the baton from debt holders and partners.
(Additional reporting by Chris Vellacott, Tommy Wilkes, Clara Ferreira-Marques and Dmitry Zhdannikov in London and Denny Thomas in Hong Kong; Editing by Alexander Smith)