Why Did the Australian Sharemarket Lose So Much Money Tuesday?

On Tuesday, the Australian share market lost $56 billion [$39 billion USD] on the back of a global shitstorm with international mining giant Glencore at its center.

Glencore is one of the most powerful companies in the world. Founded in 1974, Glencore only revealed itself to be a hulking behemoth on the world stage when it went public in May 2011, instantly turning its board of directors into billionaires.

The Swiss company now sits at the center of the global commodities market with interests in everything from wheat to iron ore, copper, coal, and oil. In Australia, it owns a string of coal mines in New South Wales and Queensland and is one of the world's biggest dealers in thermal coal. It also owns zinc, copper, and nickel mines across the various mining states.

In its time, the company has worked up a resume that has seen it implicated in circumventing UN Sanctions against tinpot dictators, driving up world food prices and possibly the deaths of anti-mine activists in the Philippines. It also makes a shit-ton of money.

But it's that capacity to continue making money that was called into question over the last two days.

Glencore has made a habit of borrowing big to fund new acquisitions over the years and in the past, industry observers have noted out how this might be bad should things go wrong on the global commodities market.

When China was swallowing whatever raw metals Australia could send its way, that wasn't a problem. Just like anyone who pointed out that the mining boom would end, critics were just killjoys. Then earlier this week a report by analyst Hunter Hillcoat asked what would happen to the company if world markets had found a new normal and global commodity prices stayed the same.

The answer was that Glencore was probably doomed. Some analysts put the company's debt at $50 billion [$35 billion USD] and in an environment where Chinese demand is crashing alongside a global oversupply in resources such as iron ore, investors decided to bail.

A massive, worldwide sell-off of resource assets follow where Glencore itself lost one third of its value and the company's CEO, Ivan Glasenberg, saw his personal wealth of $1.9 billion [$1.3 billion USD] fall by $500 million [$350 million USD]. Other big mining companies, such as Rio Tinto and BHP Billiton were also hit, but not nearly as hard.

The entire situation has people now asking whether Glencore is the resource sector's "Lehman Brothers," referring to the American bank that traded in sketchy "subprime" loans to the point where it collapsed in 2008, taking the world's economy with it.

Glencore, of course, is trying to cool things down. Everything is fine, they've said. In a nutshell, the company says the sell-off was just a panic that began on bad information, and the whole thing is just a temporary bump in the road. The resource market will recover eventually, prices will go up and the company will be all good. There are "absolutely no solvency issues." Thumbs up.

Which seems to have been enough to squash rumors that led to the sell-off, even if the company has a debt-to-equity ratio of 1.12, almost double Rio Tinto's ratio of 0.59 and S&P Capital IQ has been betting against the company, giving it a 53 percent chance of default in five years.

Should it go under tomorrow, Glencore's sudden, fiery demise would mean hell for the global economy, and particularly Australia which coasted through the last decade on high coal and iron prices.

The health of the Australian economy has been bound to the mines that once powered it through the Global Financial Crisis, making it the Saudi Arabia of the Pacific. And what the events of the last 48 hours show is the vulnerability of the Australian economy to forces beyond its control.

On balance, whether Glencore will actually go under remains to be seen. What is certain though is that mines will close and more jobs will go as the company, and even some of its competitors, seek to sure themselves up. BHP alone shed 1620 employees in Australia this week.

The only other certainty is that those who play the market are banking hard on their faith that the market will always bounce back. Until, like one day in 2008, when it didn't.

Follow Royce on Twitter.