The pendulum has swung back to thermal coal. Look no further than a letter written in March to Glencore by Sydney-based Tribeca Investment Partners requesting the miner retain its coal production instead of separately listing it in New York.
The spin-out is part of a plan announced last year in which Glencore will first buy the 20-million-tons-a-year Elk Valley Resources, a subsidiary of Canadian firm Teck Resources. The $6.9bn deal will boost Glencore’s total thermal coal output to around 130mt/y. By decluttering the portfolio, Glencore hopes the spotlight will be thrown on its copper.
But the demerger also intends to satisfy investors who have been uncomfortable with Glencore’s carbon footprint, despite an earlier pledge by the group to run down coal reserves by the mid-2040s, and shut 12 mines by 2035. More than 30% of voting shareholders opposed Glencore’s Climate Action Transition Plan at the annual general meeting in 2023. But only a year later this opposition has cooled. Whereas in 2023 it looked as if Glencore would struggle to get future Climate Plans passed, only 10% of shareholders opposed it at this year’s AGM. What changed?
Money over climate appears to be the answer. According to a report by Morgan Stanley, shareholders were concerned Glencore’s proposed split from coal would “introduce significant uncertainty”. Firstly, there are doubts as to whether Glencore’s base metals would attract a rerating, partly because the portfolio includes less compelling zinc and nickel production. Higher ratings are applied to copper-only-producing companies, the bank said. Secondly, Glencore’s base metal assets are in places perceived to be high risk, such as the Democratic Republic of the Congo and Kazakhstan.
But perhaps the more important factor in investor reckoning is that Glencore’s coal assets are viewed as a “cash cow” that strengthens the entire company and shouldn’t be relinquished.
The world’s coal sector was the beneficiary of unfortunate events in February 2022 when Russia invaded Ukraine. The energy security emergency that followed propelled coal prices to as much as $440/t compared to the previous 10-year average price of $80/t. Thermal coal prices have since retreated from 2022 highs, but they remain above the price forecast this year by S&P Global Metals of between $80 to $85/t. Morgan Stanley reckons coal is “growing, quietly”.
‘Growing, quietly’
“While copper has taken centre-stage as a play on the world’s insatiable appetite for electricity and the growing needs for grid upgrades, seaborne demand for another commodity has been growing in the background,” the bank’s analysts said in June. China, which consumes four billion tons annually – just under half of global demand – is relying increasingly on imports, up 13% year-to-date.
China’s domestic coal production is falling, owing to environmental pressures. This has a disproportionate effect on the world’s seaborne market. Every 1% growth in China’s coal demand that goes unmet by domestic mines would have a 10% impact on seaborne demand, Morgan Stanley says. China comprises a third of the seaborne market. In this context, Glencore is a key beneficiary. It exports approximately 90mt of thermal coal annually from its own mines. Every $10-per-ton change would add about $500m to its free cash flow, says Morgan Stanley.
Over the longer term, coal is at a “turning point”, according to the International Energy Agency (IEA), owing to the growing use of renewable energy, especially in Europe where electricity demand is falling anyway. Demand is expected to decline from now to 2026, it says. But in the short to medium term, coal is a business that investors will find hard to ignore. After 2026, global coal demand will have fallen to eight billion tons a year, but it will stay there partly owing to Asia where electricity consumption is growing.
In the case of China, thermal electricity output grew 5.9% year-to-date “and has been growing steadily over time”, says Morgan Stanley. Asia (including India) will constitute approximately three-quarters of global coal demand, says the IEA. For the first time, Southeast Asia will consume more than the United States and European Union.
Question marks
More broadly, there is scepticism with the way the market and governments have tackled renewable strategies. New Zealand’s utility Transpower warned in April that the nation was at risk of blackouts. Following the shift to renewables, implemented under former prime minister Jacinda Ardern – which banned new oil and gas developments – New Zealand no longer has the generating power to keep the lights on during cold spells. In a turn of events that will register with South Africans, Transpower begged consumers to cut their electricity consumption.
As long as we need energy people will burn coal. If you don’t have energy security you have chaos – Vuslat Bayoğlu, Menar
One person who has questioned the ability of renewables to sustainably fix the globe’s energy demand is Vuslat Bayoğlu, MD of Menar, a privately owned 3.5mt/y coal exporter. “There is no way renewable power can provide the baseload power of thermal coal,” says Bayoğlu. “As long as we need energy people will burn coal. If you don’t have energy security you have chaos. What we need to do is focus on how to we burn in a clean manner.” Bayoğlu is an outspoken critic of Eskom’s former CEO André de Ruyter for persisting with a renewable strategy to solve loadshedding. “You can’t solve the problem with renewable energy, you need baseload,” he says.
This was tacitly acknowledged in Eskom’s successful appeal in June enabling it to keep 45MW of polluting coal-powered energy production open until 2030 without facing stringent restrictions. Closing the coal-fired power stations “potentially involved plunging the country into darkness”, said a report that informed Environment Minister Barbara Creecy’s decision on Eskom’s appeal.
Bayoğlu also thinks an estimated R350bn upgrading South Africa’s distribution network to cater for renewable power is a waste. Failing to recognise the importance of coal to energy security is akin to the West’s failure to secure the mineral supply chains for electric vehicle manufacture – now firmly controlled by a fully integrated Chinese industry, he says. It’s no accident China’s EVs are outselling Western rivals.
“China controls 80% of solar panel production. They are building coal-fired power stations because they see there is no other way. The world is closing coal-fired power stations but in Germany companies are moving to Poland because they can’t afford the energy prices.”
Instead of aggressively phasing out coal, the South African government’s Integrated Resource Plan (IRP), an energy strategy, has taken a more moderate stance recommending 18 000MW in coal-fired power generation by 2050 instead of the previous target of 10 000MW. Coal must be a part of a diversified energy portfolio,” says July Ndlovu, CEO of Thungela. Government has accepted reality, he adds.
The IRP may give impetus to players such as Exxaro Resources which says it may develop coal reserves in Limpopo province. “We still have reserves in the likes of Thabametsi; there’s a lot of power station coal there,” says Exxaro CEO Nombasa Tsengwa. Coal may provide a more affordable and less risky destination for R12bn in cash held by Exxaro for diversification into “green metals” that is proving hard to realise.
Tsengwa says a meeting with the World Economic Forum in 2022 registered with her. South Africa’s renewable strategy can’t be met to its fullest extent, at least not yet, says Tsengwa. It depends on developing a national distribution network that isn’t currently sufficient to support the scale of renewable projects in the pipeline.
Developed economies are facing similar problems. Germany’s climate adviser said in June the country’s 2030 goal was likely beyond it. In April, Scotland ditched its 2030 decarbonisation target saying it was “out of reach” following delays to its draft climate change plan.
There’s too much demonising between industry and the environmental community right now. It’s like a fight to the death – Paul Bodnar
In the private sector “green funds” haven’t performed, resulting in significant redemptions. According to Barclays, investors globally have pulled about $38bn out of environmental, social, and governance (ESG) funds this year. In fact, 2024 is set to be the first year on record where ESG-labelled funds have seen more money withdrawn than added. Net ESG fund inflows in the UK have declined from £11bn in 2021 to a negative £3bn this year (see graph).
Investors have called for a more reasoned approach to the fossil fuel-renewable nexus. “There’s too much demonising between industry and the environmental community right now,” said Paul Bodnar, BlackRock, Inc.’s former chief of sustainable investing, at a conference in June. “It’s like a fight to the death. It needs to be a little bit more of a cooperative posture.”
Clearly fossil fuels are here to stay, at least in the short term – but their risks will be ignored at our collective peril, says former CEO of BP Lord John Browne. He was quoted in the Financial Times referencing the Aesop fable of the rider who stops feeding his horse in peacetime, only to find it lame when war comes. The soldier in the analogy represented the companies who are pulling back on climate action, creating more long-term risk for all concerned as the ever-greater effects of the climate crisis loom.
“The story is a good reminder that if we want something to serve us longer, we need to take care of it constantly,” he said. “The hard truth is that we’ve done a poor job of reconciling corporate actions with the interests of society and the planet in a balanced way. Yet the urgent need to do so is undiminished.”