Glencore has vowed to cap its coal production in the face of pressure from big investors who are pushing natural resource companies to take firmer action on climate change.
The mining and trading group led by Ivan Glasenberg on Wednesday said it would cap its production of thermal and coking coal at about 150m tonnes per year, close to its planned output level in 2019, with further expansion of its coal business largely ruled out.
The move is likely to send shockwaves across the coal industry because of the company’s bullish stance on the highly polluting fossil fuel. Glencore is the world’s top coal exporter and one of the biggest producers outside of China. Mr Glasenberg is a former trader and vocal champion of coal, which is used to generate electricity and also produce steel.
Glencore is stopping well short of abandoning coal altogether like rival mining group Rio Tinto. It will continue to operate its mines, which are largely based in Australia and produce high-energy coal, for at least another 15 years — or around the time leading forecasters expect demand for the fuel to peak.
The move is part of plans by Glencore to align its business with the goals of the Paris climate change agreement. The company has also pledged to publish new long-term targets for reducing its greenhouse gas emissions and review its membership of trade associations that lobby for fossil fuels, among other measures.
Although Glencore couched the move as part of its commitments to the Paris agreement, it may also benefit from forestalling coal investments across the industry, which could lead to tighter supplies — and higher prices — should demand for the fuel rise more quickly than forecast.
“Glencore had a market share of nearly 25 per cent in the seaborne trade last year. It also has a dominant position in the premium thermal coal segment”, said Prakash Sharma, research director at consultancy Wood Mackenzie.
“In that regard, capping coal production is significant because prices could remain high amid tighter supplies. Glencore is chasing value over volume.”
“In a 2-degree scenario, premium thermal coal demand is expected to be resilient compared to other coal types. That means companies holding on to high energy thermal coal assets stand to gain and will realise higher prices,” he added.
Glencore’s coal operations contributed almost a third of its underlying earnings in the past year and generated billions of dollars of cash that were used to fund dividends and share buybacks.
The only circumstances under which Glencore will now increase coal production is if a joint venture partner decides to sell, and the company has the first right of refusal on a buyout.
The Church of England, which has led investor engagement with Glencore on behalf of the Climate Action 100+, an initiative led by investors with more than $32tn of assets under management, said the move would send a powerful signal to the rest of the sector that coal was “no longer a sustainable part of their portfolios”.
“Glencore has been . . . pretty bullish on coal. The fact that they have agreed not to grow their coal capacity sends a very clear message, ” said Edward Mason, head of responsible investment for the Church Commissioners of England. “Investors will now want to hold Glencore to its commitments.”
Glencore plans to invest cash generated by the coal business in metals that are likely to benefit from the rise of electric vehicles, battery storage and renewable energy. These include copper, cobalt and nickel, markets where the company already has strong positions.
Tony Hayward, Glencore chairman, said the miner was increasingly focused on maintaining its “social licence to operate”.
“Glencore’s portfolio of commodities allows the company to play a key role in enabling the transition to a low-carbon economy,” he said.
The coal industry has faced unprecedented pressure in recent years, with most western banks stopping the funding of new coal mines because of shareholders’ concerns about the fossil fuel’s contribution to climate change.
Last week, Japanese trading house Itochu Corp said it would not make fresh investments in coal and sold its 12.5 per cent stake in the Rolleston mine in Australia, where Glencore is also a shareholder.
But while demand for the fuel has plateaued or fallen in most developed economies, consumption globally has soared by more than 60 per cent over the past two decades because of the rapid industrialisation of China and other emerging economies, earning billions of dollars for companies such as Glencore, BHP Group and Anglo American.
Mr Glasenberg acknowledged Glencore’s decision could boost coal prices amid signs demand is continuing to rise due to growing consumption in India, Bangladesh and some other emerging economies.
“It should bode well for the [coal] price as . . . it’s one of the few commodities in the world where there is no big new supply,” Mr Glasenberg said on Wednesday after the company announced full-year results, including a new $2bn share buyback programme.
Last year, coal prices soared to $115 a tonne, up as much as 60 per cent from its low point in May 2017, as supplies lagged behind demand in Asia. The price has since fallen back to about $90.
The pace of coal consumption growth has slowed in recent years, however, partly as China has moved to reduce pollution in its largest cities by turning towards cleaner-burning fuels such as natural gas.
That may make Glencore’s decision more palatable for its top management if they have concluded coal demand could peak sooner than anticipated.
“Showing the positive outcome of engagement, institutional investors have been able to align their long-term interests with Glencore’s aim to become a proponent of the energy transition,” said George Cheveley, Portfolio Manager, Investec Asset Management Natural Resources Team.
