Coal blackens the veins and arteries of Glencore, the world’s biggest commodities trader, and those of its South African CEO, Ivan Glasenberg. Both owe their existence to coal. Coal is Glencore’s biggest commodity, hauling in more than US$5-billion a year in profits for the company. Mr. Glasenberg began his career as a coal trader and has cherished the dirtiest fossil-fuel ever since, to the point Glencore is the global leader in the coal used to fire up electricity-generating plants.
So why did Glencore buckle on its coal strategy?
The week before last, Glencore made an extraordinary statement that no one saw coming. It said it would cap the production of thermal and coking coal (used for steel making) at its existing level of 150 million tonnes a year – roughly its current level – and make no big investments in new coal mines. In a statement, Glencore said “we have a key role in enabling transition to a low-carbon economy.”
But before you hail Mr. Glasenberg as an eco-warrior suddenly sprung from the closet – who knew that his black heart was turning green? – consider that he has delivered a double win for himself and his US$56-billion company. What looks like a sacrifice for the greater good of the planet comes as no sacrifice to Glencore and its shareholders.
The decision to stop raising its coal output produces two cheery outcomes for Glencore: Capping coal production will put some upward pressure on coal prices (or help insulate the price from big price downturns); and it gets Climate Action 100+, a powerful group of global investors committed to tackling greenhouse gas emissions, off its back.
Glencore is still a great believer in coal. As late as last year, it was placing big bets on it, paying US$1.7-billion for Rio Tinto’s coal assets in Australia, solidifying its status as Australia’s dominant coal producer. You can assume that Glencore’s love affair with coal hasn’t suddenly vanished since then. Instead, capping its coal production was no doubt making a virtue of a necessity. At 150 million tonnes a year, Glencore had pretty much peaked out on coal production. It has no capacity to go beyond that figure.
Capping coal production does not mean capping coal profits. In spite of the enormous solar- and wind-power investments being made everywhere, coal remains the preferred fuel for electricity generation. The International Energy Agency says global coal demand actually grew by 1 per cent in 2017 after two years of declines (the 2018 figure has not been published) and that overall demand through 2023 will be stable as stronger demand in high-growth Asia offsets declines in Europe and North America.
Glencore is well aware that demand for its thermal coal is assured and that the high quality of the coal it produces means its market share will remain intact. By capping its own production in a robust coal market, coal supplies are likely to tighten up, pushing up prices. Glencore wins.
At the same time, Glencore has secured a fairly easy victory with Climate Action 100+, which praised Glencore’s agreement to cap coal production.
This is not to say Climate Action is a pushover. The group represents investors with US$33-trillion in firepower. Its steering committee includes representatives from some of the world’s biggest investors, including the asset management arms of Manulife and HSBC and the California Public Employees’ Retirement System. Member companies, among them Suncor and Teck Resources of Canada, believe that man-made carbon emissions are heating up the planet and that meeting the goals of the 2015 Paris climate summit, which seek to prevent temperatures from rising beyond 2 degrees above pre-industrial levels, are necessary to avert potentially cataclysmic climate upheaval.
Mr. Glasenberg knew what was good for him and his company. If he had resisted Climate Action’s pressure, its investor members could have flexed their muscles by proposing shareholder resolutions that would demand that Glencore scale back its coal production, or voted against the re-election of Glencore’s directors.
Shareholder resolutions related to climate change are gaining momentum and producing breakthrough results. Last year, for example, shareholders delivered a climate wake-up call to Kinder Morgan, the U.S. energy infrastructure giant that wanted to build Canada’s Trans Mountain pipeline, when they passed a resolution requiring the company to produce a detailed report on the impact of its business under the Paris agreement. The resolution also required Kinder Morgan to show how it intends to transition to a low-carbon future.
Mr. Glasenberg had to decide whether to ignore the Climate Action group and face the consequences as the shareholder-resolution cannons were loaded up, or wave the white flag and allow the Climate Group to declare victory. In the end, it was an easy choice. Glencore’s coal-capping agreement does not threaten the company’s hefty coal profits. At the same time, it buys Glencore and Mr. Glasenberg some public goodwill, a commodity that has been in rather short supply recently at the company, whose activities in Nigeria, Venezuela and the Democratic Republic of Congo are under investigation by the U.S. Department of Justice.
That’s a win-win for Glencore – a clever move by Mr. Glasenberg. Whether it marks a true victory for the battle against climate change is less easy to answer.
Eric Reguly