The Sunday Times
Secretive Swiss trader links City to Iraq oil scam
By Peter Koenig
Special report: Next month’s UN report will drag British-based miner Xstrata into the controversy over surcharges paid to Saddam
THE oil tanker Artemis slipped its mooring in the Turkish port of Ceyhan on November 18, 2000, carrying 100m barrels of Iraqi crude under the United Nations oil-for-food programme.
The tanker headed for America to sell the shipment at a price pegged to West Texas crude.
It stopped off in Omisalj, a Croatian port on the island of Krk and the oil was put in a storage facility owned by the Croatian petroleum company INA. The diversion has since become a matter of dispute between the UN and the cargo’s owner, a Swiss commodities firm called Glencore.
The UN said Croatia was the final destination for the shipment and asked Glencore to pay it pegged to European rather than American prices. The difference was $3m and Glencore UK, based in Mayfair, London, sent the UN a cheque to cover that amount. Glencore said last week that Croatia was never meant to be the oil’s final destination. It said there was a misunderstanding due to the UN’s fuzzy rules on Iraq oil-for-food shipments.
All this is of more than academic interest to the City. Next month the UN will report on companies buying oil from Saddam Hussein’s government. The odds are it will mention Glencore. This will not only focus attention on Glencore, but also drag the FTSE 100 mining company Xstrata into the scandal, because Glencore controls 40% of it.
In financial circles, Glencore is known for its success. The company earned $1.5 billion (£845m) last year, putting it on a par with the City’s largest hedge funds.
Glencore is also known as the company founded by Marc Rich, the commodities trader who fled to Switzerland from the US after being charged for embargo-busting in Iran following the Khomeini revolution. Four years ago, Rich was pardoned by President Bill Clinton on Clinton’s last day in the White House.
Glencore has been named in connection with irregularities in the oil-for-food programme by the CIA. The US spy agency obtained a register of firms that Iraq’s State Oil Marketing Organisation (Somo) said had paid illegal surcharges on oil-for-food deals.
“According to Somo records, one of the most active purchasers of Iraqi crude was a Swiss-based company named Glencore,” the CIA noted. “It paid $3,222,780 in illegal surcharges during the period of the programme.” A CIA spokeswoman said last week that the agency had come to no conclusion on the veracity of Somo records.
The company, for its part, said: “Glencore never paid any surcharges or made any improper payments to Somo or to any other branch of the Iraqi government, or to Iraqi officials.”
New light may be shed next month, when UN investigators, led by former US Federal Reserve Bank chairman Paul Volcker, review Glencore and its activities in Iraq.
On September 7, the Volcker committee published the first part of its report, criticising UN secretary-general Kofi Annan for allowing the oil-for-food programme to become corrupt.
As Saddam’s regime offered discounts from the official price to the 600 companies authorised to buy its crude, it separately collected surcharges of up to 50 cents a barrel on shipments.
The Volcker committee found that in the course of $64 billion in Iraqi oil-for-food sales “nearly one-third of the surcharge payments were made by cash delivery to various Iraqi embassies abroad”.
Last week Glencore said: “Along with other companies, Glencore was contacted by the Independent Inquiry Committee and fully co-operated with their representatives. Glencore has no expectation one way or the other as to whether it will be mentioned in the report.”
XSTRATA said Glencore’s links to Iraq would have no negative effect on it.
City analysts said Mick Davis, the Xstrata chief executive appointed by Glencore, might see any problems the Swiss firm encountered as an opportunity to seek a reduction in Glencore’s stake in the UK miner.
Xstrata jealously guards its independence from Glencore. The terms of the relationship between the two companies are spelt out in a legally binding “relationship agreement”. Glencore chairman Willy Strothotte is Xstrata’s chairman.
Xstrata has the option of using the Swiss company as a marketing agent.
But only three of the mining company’s 12-member board are Glencore appointees. The non-execs, led by former Legal & General investment boss David Rough, are known for their tough-mindedness.
City analysts don’t think that news about Glencore in Iraq next month will hit Xstrata’s share price.
The possibility of criticism of Glencore next month by the Volcker committe “is obviously not good news for Xstrata”, a City analyst said. “But people are more focused on the impact of coal prices on Xstrata.”
When the City looks at the relationship between Glencore and Xstrata overall, opinion divides. Dresdner Kleinwort Benson mining analyst Simon Toyne said: “There is one group of shareholders that says Glencore’s stake is a risk.
“Glencore might sell its shares and the price would go down. More than offsetting that are the investors who see the Glencore stake as a benefit, because Xstrata can market product through Glencore.”
RREV, a corporate-governance watchdog run by the National Association of Pension Funds, and a US partner raised questions about the relationship earlier this year. RREV advised its clients to vote against the re-election of Strothotte as Xstrata chairman. Strothotte heads Xstrata’s remuneration committee, in addition to being chairman. RREV opposes this dual role.
Whatever the impact of Glencore’s activities in Iraq, the news about its involvement in the oil-for-food scandal is focusing attention on it — and on its relationship with Xstrata.
Glencore said the Swiss firm was unfairly targeted because of the notoriety of its founder, Rich.
Glencore’s critics — including backbench Australian MPs worried about its deals in Australia, and the American magazine Business Week, which on July 18 published a critical report on the world of Marc Rich — say that Rich may be gone, but the culture he created at the company isn’t.
RICH was born in Antwerp in 1934 and arrived in the US at the age of eight when his family fled the Nazis.
In 1954 he joined Phillip Brothers and became the protégé of the celebrated commodities trader Ludwig Jesselson. In 1973, he struck out on his own.
Rich and colleagues, including Pincus “Pinky” Green — known as the Admiral for his cleverness in chartering ships — incorporated their company in Switzerland in 1974.
Rich’s penchant for doing business in murky parts of the world backfired when in 1983 Rudolph Giuliani, then the US attorney for the southern district of New York, indicted him and his company for income-tax evasion and sanction-busting in Iran.
Rich’s status as a fugitive threw up business problems.
He was banned from selling minerals to the US Mint. In 1992 American workers locked out of the Ravenswood aluminium rolling mill on the Ohio River in West Virginia — indirectly controlled by Glencore — staged a demonstration outside the company’s headquarters, upsetting the company’s well-heeled neighbours.
In June 1992 Strothotte, who started out in Germany as a metals trader and joined Rich in 1978, left the company. He returned in February 1993 when Rich agreed to sell down his majority 51% stake in Glencore.
Rich wanted to reduce his stake to 15% over five years. Strothotte and colleagues wanted Rich gone completely, and faster. Rich lost the power struggle.
Over the past 11 years Strothotte, 61, Australian chief executive Ivan Glasenberg, 48, and UK chief Daniel Dreyfuss, 50, have built Glencore into one of the largest private companies in the world.
The firm’s capacity to trade oil, coal, aluminium, copper, zinc, copper, lead, nickel, cobalt, wheat, maize, barley, edible oils and sugar from 60 field offices in 50 countries has turned it into one of the biggest beneficiaries of the commodities boom.
Glencore continues to guard its privacy. Investors interested in the company can only get financial details if they buy the one security Glencore has issued — a $950m Luxembourg bond floated last year. Everyone else is barred from the company’s password- protected part of the website.
Glencore had $4.6 billion in shareholders equity at the end of last year. Since the company is 100% management-owned, this money is controlled by its senior executives.
Glencore’s 2,000 employees share in regular distributions of its profits. The company said that the distributions were in line with public-company bonuses.
“You can safely assume that the top people at Glencore come close to being billionaires,” said a London broker who knows the company.
Under Rich, Glencore diversified from commodities trading into buying mines, mills and other industrial assets. Under Strothotte, Glencore has reorganised these assets, partially selling them through public share offerings.
In 1996 Glencore gave the go-ahead to the flotation of California-based Century Aluminum on Nasdaq.
“We had assets, including the Ravenswood rolling mill, that did not sit comfortably with the trading side of the business,” said Century chief executive Craig Davis.
Since Rich’s departure Glencore has also reorganised and developed a Swiss minerals company called Suedelektra. Strothotte changed its name to Xstrata and hired Davis, the South African who helped form BHP-Billiton, the world’s largest mining company, to run it.
When Glencore’s plan to sell its Australian and South African coalmines via a flotation on the Australian Stock Exchange was aborted by the 9/11 terrorist attacks, Davis saw an opportunity.
Xstrata arranged to buy those coalmines from Glencore and float itself on the London Stock Exchange. It raised £800m, mainly from City institutions.
In 2003 Xstrata acquired the Australian coal and copper mining icon MIM Holdings. Last month it took a 20% stake in the Canadian nickel producer Falconbridge.
As a result of its growth-through-acquisition strategy, Xstrata is now ranked ninth by market capitalisation in the world’s consolidating mining industry.
In 2004, it reported a 75% jump in sales to $6.1 billion and a 280% leap in net income to $1.1 billion.
Glencore continues to evolve from a purely private Swiss firm into a private company with a selective presence in public capital markets.
In the past it paid virtually no attention to the perceptions of investors, government officials, regulators and the public, because they had nothing to do with the company’s trades.
Now outside perceptions matter more.
Business Week’s July story about the legacy of Marc Rich may have caused a small market ruction.
The price of Glencore’s Luxembourg bond fell relative to similarly rated issues, said analyst Joanne Fisher at the Boston-based fund manager Pioneer. She said that the price of the bond rose again when the company reported strong financial results.
Glencore disputes this. “Spreads were very stable around the date of July 18,” a company spokesman said.
Glencore’s transformation from super-secret to semi-public company is centred in London. Xstrata, its biggest co-investment with public investors, confirms that.
The City — along with Glencore and Xstrata executives — will be watching to see what, if any, difference the Volcker committee’s disclosures next month make to one of the world’s most powerful companies.
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