Glencore’s watershed on coal
Though it has been snapping up mines over the past few years, the commodities group has put a cap on production
It’s good public relations, but is it good news? After having spent the past few years mopping up various coal mines, global commodities group Glencore has made a U-turn, announcing a cap on coal production and an effective bar on new production.
The announcement was made last week by SA-born CEO Ivan Glasenberg, who is under pressure from major investors that want natural resource companies to start taking climate change seriously. Glasenberg now says the company will cap its production of both thermal and coking coal at about 150Mt a year, which is almost exactly its planned output level for this year.
Glencore also ruled out further expansion of its coal business, except in situations where an existing joint-venture partner might want to exit the business. Also, the company will review its membership of trade associations that lobby for fossil fuels. It’s a big deal, partly because Glencore constitutes about 25% of the global seaborne coal trade, and coal now constitutes about a third of its business.
To sum it up, the move left investors somewhat pleased, somewhat relieved, somewhat cynical and somewhat perplexed.
On the last point, investors are perplexed precisely because Glencore has bought several new coal mines over the past few years, notably buying rival Rio Tinto’s interests in several Australian mines, including Hail Creek and Valeria coal mine, last year for $1.7bn. That acquisition, and the rising price of coal, is likely to push Glencore’s profits from coal up enough to eclipse its copper earnings for the first time since the company listed in 2011.
In that context, the decision to cap production is something of a sea-change both for Glasenberg’s company and for the industry, since it suggests that even the most bullish advocates are now recognising that thermal coal production (coal used primarily in power plants) is probably on a downward track.
Jesse Burton, a researcher at the University of Cape Town’s Energy Research Centre, says the decline of coal is visible in the shrinking rate of coal power plants coming into production after furious growth over the past decade. According to the CoalSwarm Global Coal Plant Tracker, China, which brought on between 50GW and 80GW of coal power every year between 2006 and 2016, brought on only 34GW last year.
Of course, US President Donald Trump is a big supporter of coal. And yet, despite that, the world largest economy hasn’t introduced any new coal power for the past three years. In fact, the only country where coal use is increasing is in Japan, where nuclear power has lost favour after the Fukushima incident.
Burton says she is both cynical and pleased about Glencore’s decision because it changes the power environment in two crucial ways: first, it demonstrates a major change in attitude on the part of investors; and second, it underlines a recognition about the efficacy of renewable power.
"It does suggest that coal is in long-term structural decline. It’s probably also a strategically good move for the company to limit over-investment in the industry, and that could be supportive of coal prices."
Rather amazingly, the engagement with Glencore was led by the Church of England on behalf of a group called Climate Action 100+, an investor group with more than $32-trillion of assets under management.
Matthew Shields, an analyst at Avior Capital Markets, says this is part of the wider "push towards socially responsible investing, with large international fund managers reducing exposure to thermal coal".
Some investors, understandably, adopt a cautious tone when a company’s exposure to coal is more than 20% of its profits, while others have banned investment altogether. Many companies are thinking about other ways to reduce their carbon footprint by, for example, investing in renewable energy which would make the company more carbon neutral.
Whether it will make Glencore any more beloved by investors is unclear. Already, the analyst community is strongly positive about Glencore. A vast majority of analysts, Shields among them, call it as a "buy" or "strong buy".
"Glencore appears cheap, and, like other mining companies, had a good run since its lows in 2016," he says.
But Shields, like others, is wary, given that Glencore is under investigation by the US department of justice for alleged corruption — a probe which could hang over the stock for several years.
Over the past year, Glencore’s share has fallen 12.8%, though it has risen 114% from its 2016 low. Compared with its rivals, it also looks cheap, trading on a forward p:e ratio of just 10.3 — in the same region as its big rivals Rio Tinto and Anglo American, but slightly less than BHP, which is trading on about 14 times forward earnings.