Anglo–Swiss commodity and mining behemoth Glencore saw its shares slip another 26 percent on Monday with analysts stressing that the weakness is likely to be felt across the entire sector.
London-listed shares of Glencore briefly hit 69 pence in morning trade Monday. It was on course for its worst intraday move on record with shares tumbling 75 percent year-to-date and 85 percent since its flotation in 2011. The U.K. FTSE 350 mining index hit its lowest level since 2008 on the back of Glencore's fall.
Weaker commodity prices and softening Chinese demand have put the brakes on the formerly formidable rise the sector enjoyed over the last decade, but analysts have highlighted that Glencore's main problem is actually its debt load.
"Mining companies gorged themselves on cheap debt in a race to grow production following the Chinese stimulus that occurred in the wake of the (global financial crash)," a team of Investec analysts, led by Hunter Hillcoat, said in a note on Monday morning.
"The consequences are only now coming home to roost, as mines take a long time to build."
Investec said that Glencore had a "higher debt base" than its peers and a "lower-margin asset base," adding that its debt levels would still be above its rivals despite an intense period of restructuring over the next five years.
In other words, Glencore bet the company on commodity prices going up. The opposite happened in oil and then in metals and everything else and went deep into debt doing so, playing the Too Big To Fail Casino. But in the end, the house always wins, and now the question is what happens to the commodities market should Glencore go belly up.
A lot of banks gave Glencore a lot of money to invest in mining. If these banks don't get paid back, well, we're looking at the kind of counter-party mess the banks got into in 2007.
Keep an eye on this one, folks. It has the potential to really get ugly.