Glencore failed to deliver about 3m pounds of cotton owed to rival commodities trader Noble Agri earlier this year and may have to pay a financial penalty over the lapse, industry executives said.
The unfulfilled contracts are considered a default under the rules of the ICE Futures US exchange, the main trading venue for cotton derivatives, executives said. The event took place in May, well before acute concerns about GlencoreΆs debt burden spooked investors. The amount at issue represents a fraction of the global cotton market.
The rare but small default will nevertheless intensify the spotlight on Glencore at a delicate moment, as it seeks sell a minority stake in its agricultural business — which includes cotton trading — to help raise $10bn to pay down debt.
Glencore and Noble Agri, a joint venture of Noble Group of Hong Kong and ChinaΆs Cofco, belong to an elite tier of merchants shipping cotton from exporters such as the US and Brazil to textile mills in Asia.
Most supply deals are directly negotiated between farmers and merchants, merchants and mills or one merchant and another. However, a handful of cotton changes hands when futures contracts expire, obligating sellers to deliver bales to buyers.
In May, futures sellers pledged to deliver a total of 302 contracts of 50,000lb each, ICE records show. However on May 27, GlencoreΆs broker notified NobleΆs broker that Glencore would not move a portion of bales it had sold at the exchange.
“There is a balance of 60 contracts that will not be delivered,” according to an email from broker SG Americas Securities seen by the Financial Times. “Please refer to the defaults in delivery section of the ICE Futures US, Inc cotton rule book where you can find various settlement scenarios.”
At the time, cotton was worth $0.6526 per lb.
Glencore did not deliver the exchange-certified cotton because it was unable to get it graded before the contract deadline, people familiar with the matter said. Federal law requires US cotton listed on the ICE futures exchange to be sampled and graded by the US Department of Agriculture.
The ungraded cotton amounted to about 5 per cent of the total that Glencore delivered during the period, a person close to the company said. Glencore offered to deliver the missing bales or be invoiced for the difference, this person said. Noble instead sought to charge Glencore an invoice, a penalty and a fee for missing cotton samples, the person said. The matter is now in arbitration.
ICE rules specify a penalty of $0.04 for each pound of undelivered cotton, which would total $120,000 for the 3m pounds at issue. A special exchange committee convened on the case last week, but any penalty has yet to be decided, people familiar with the matter said. Glencore and Noble disagree about the amount that is owed, with Glencore offering about $70,000.
Exchange operator Intercontinental Exchange, Noble Agri and Glencore all declined to comment.
Cotton futures defaults, which exchange rules say include “a failure to make delivery against a delivery notice as required”, are very unusual. “To my knowledge thereΆs never been an actual default or failure to deliver,” said Gary Taylor, a former head of CargillΆs cotton division.
