King Coal Isn’t Dead Yet. Ask Glencore

Clara Ferreira Marques

(Bloomberg Opinion) -- Thermal coal has become a byword for the resource industry’s climate crimes. From BlackRock Inc. down, fund managers are reluctant to touch a mineral that releases more carbon dioxide than any other energy source. Large miners, from BHP Group to Anglo American Plc, are trying to dump it. Coal is also — for now at least — profitable.

It’s the unpalatable truth that explains why Glencore Plc, the world’s largest exporter of the black stuff, sticks with a dying fuel. Morals aside, the details suggest Chief Executive Officer Ivan Glasenberg and his team may well be right.

Tuesday’s full-year earnings from the trader and miner bore more than a few smudges. Lower prices for commodities like copper and cobalt took a heavy toll. Coal didn’t help, with the price of benchmark Newcastle coal down by over a third in 2019. Colombia, where Glencore’s reserves will run out in the next decade or so, accounted for nearly $1 billion of a $2.8 billion impairment that dragged the company to its first net loss since 2015. Those mines supply an Atlantic market where demand has all but dried up, thanks to mild weather, high European carbon prices and cheap gas.

But that doesn’t mean the end is nigh.

Coal is obviously not the energy source of the future. That much is apparent even to those who agree with the International Energy Agency’s “stated policy” scenario, which sees global coal demand roughly flat out to 2040. Glencore veterans like Glasenberg, who won his spurs trading the mineral, and some of his potential successors can be counted among them.

Yet it’s also clear from 2019’s numbers that there will be short-term opportunities. Asian demand is holding and global supply is starting to come under pressure, as diversified miners divest and financing costs rise. Last year, global seaborne thermal coal demand was up 1.5%, despite an 18% drop in the market that feeds Europe. That’s because in absolute terms, the European drop adds up to 30 million metric tons — more than covered by Asia’s rise of less than 6%, or 47 million tons.  Consider that over the past 20 years, Asia has accounted for some 90% of all coal-fired plants built globally. That suggests demand will hold enough to support reduced supply, even if by the 2030s more than 80% of the world’s appetite will come from Vietnam, India and their neighbors. Plans from homegrown suppliers like Coal India Ltd. will almost certainly fail to satiate domestic demand.

Granted, sticking with thermal coal isn’t a good way to attract investors guided by environmental, social and governance criteria. Yet that’s not, as yet, a justification to sell, either. Under the current investment criteria at BlackRock, for example, Glencore just needs to keep coal contributing less than a quarter of its revenue. Last year, it amounted to about 4% of the top line, even if  the contribution was closer to a quarter in terms of earnings before interest, tax, depreciation and amortization. Thanks to depleting assets in Colombia, Glencore can even hit its target of shrinking carbon emissions produced by its supply chain, so-called Scope 3, by 30% by 2035, without much effort.

Glencore’s coal Ebitda margins fell sharply last year but remain at a decent 36%, meaning the commodity is still one of its most profitable segments. The fuel effectively funds greener ventures, and keeps trading activities ticking over. That’s a good enough reason not to spin off the business, which may in any event do little to help clear other valuation-hampering questions, over leadership and a pending U.S. Department of Justice investigation into possible money-laundering and corruption.Staying put means Glencore could also snap up some bargains, with BHP selling its huge Mount Arthur mine in Australia, not far from its rival’s Hunter Valley assets. Glasenberg has capped coal production at 150 million metric tons — an expedient decision that helps support prices — but there is no reason not to swap Colombian assets for Asia-facing Australia.

The risk of meddling with a moribund commodity, even when you account for much of the world’s seaborne supply, is that you can end up with worthless assets. Unfortunately for a warming climate, that looks a distant enough prospect for the world’s largest commodities trader.

 

To contact the author of this story: Clara Ferreira Marques at cferreirama@bloomberg.net

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Clara Ferreira Marques is a Bloomberg Opinion columnist covering commodities and environmental, social and governance issues. Previously, she was an associate editor for Reuters Breakingviews, and editor and correspondent for Reuters in Singapore, India, the U.K., Italy and Russia.

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