King Coal isn’t dead yet – just ask Glencore

Thermal coal has become a byword for the resource industry's climate crimes. From BlackRock 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, are trying to dump it.

Coal is also – for now at least – profitable.

It's the unpalatable truth that explains why Glencore, 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.

Coal is dirty but profitable for Glencore’s billionaire CEO Ivan Glasenberg.Credit:Chris Ratcliffe

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 $US1 billion ($1.5 billion) of a $US2.8 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.

Short-term opportunities

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 per cent, despite an 18 per cent drop in the market that feeds Europe. That's because in absolute terms, the European drop adds up to 30 million metric tonnes – more than covered by Asia's rise of less than 6 per cent, or 47 million tons.

Consider that over the past 20 years, Asia has accounted for some 90 per cent 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 per cent of the world's appetite will come from Vietnam, India and their neighbours. Plans from homegrown suppliers like Coal India 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.

Glencore could snap up BHP’s Mount Arthur mine.Credit:Jonathan Carroll

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 per cent of the top line, even if the contribution was closer to a quarter in terms of earnings before interest, tax, depreciation and amortisation. 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 per cent by 2035, without much effort.

Glencore's coal earnings margins fell sharply last year but remain at a decent 36 per cent, 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 US 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 the Hunter Valley, not far from its rival's assets. Glasenberg has capped coal production at 150 million metric tonnes – 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.


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