Glencore is in the pound seats when it comes to dominating in the metals and minerals the modern world needs, and – according to environmentalists – some of the minerals it doesn’t, such as coal. It may be corporate positioning par excellence, but with it come challenges, writes CHARLOTTE MATHEWS.
FEW things excite a dyed-in-the-wool trader like a looming shortage. As world leaders grapple with ways to decarbonise energy and transport, blue sky is opening up for companies like Glencore that mine and trade the essential ingredients for “a greener future”.
Glencore, which started as a trading house and later acquired agricultural, minerals and oil assets, is in the top three of copper, cobalt, zinc and seaborne thermal coal producers, and in the top five of nickel producers.
In 2018, marketing and mining energy products, mostly coal, was Glencore’s most profitable activity. It contributed $6.1bn to group EBITDA of $15.8bn, growing 31% over 2017, reflecting both higher coal prices and acquisitions. But the balance is expected to shift in the next few years.
In Glencore’s latest annual report, CEO Ivan Glasenberg said that, to deliver a strong investment case to shareholders “… we must invest in assets that will be resilient to regulatory, physical and operational risks related to climate change”.
“We are prioritising our capital investment to grow the production of commodities essential to the energy and mobility transition and which support the growing needs of a lower carbon economy,” he said.
Copper, cobalt and nickel, along with lithium, are the inputs needed for electric vehicles (EVs), energy storage and cabling. Their prices are expected to soar so as to incentivise the additional production needed to transition to a low-carbon world.
The world’s last great commodities boom, which lasted from about 2000 to 2007, was a response to China’s rapid industrialisation, placing pressure on supply of infrastructural materials from iron ore and metallurgical coal to copper and aluminium. As China moves towards a more balanced economy, with greater growth in the consumer and services sector, demand for those commodities has normalised.
However, ongoing industrialisation in the rest of Asia and Africa continues to underpin the future of infrastructural materials.
The next wave of demand will come from the greening economy, which requires a different range of inputs.
Paul Gait, senior research analyst at AB Bernstein in London, recently published a note on the impact on copper miners of climate change policies: Decarbonisation, the “Green New Deal” and mining.
Copper is essential as an electricity conductor, for safety, and because it can be recycled without loss of performance. Renewable energy also uses between three and ten times more copper than conventional power generation while electric vehicles are more copper intensive than other forms of transport.
Gait said that to meet governments’ commitments to cut emissions to 2030 set out in the Paris Agreement, between 11 and 72 million tonnes (Mt) of incremental copper production would be needed in addition to meeting normal industrial demand. That implied copper production would have to grow by between 3.1% and 5.8% a year. More radical calls for faster global decarbonising would vastly increase the amount of copper required.
To deliver the necessary capital to invest in growing production, copper prices (currently around $6,500/t) would have to rise to between $8,300/t and $11,100/t. Higher copper prices meant a significant uplift in the share prices of companies such as Ivanhoe, First Quantum, Glencore, Antofagasta and Anglo American, Gait said.
IN a presentation at the Bank of America/Merrill Lynch conference in May, Glasenberg cited a forecast that by 2030 there would be more than 140 million electric vehicles (EVs) on the road and by 2040 there would be 620 million EVs.
Electrification of the transport system will require an estimated three million tonnes a year of copper a year by 2030; 1.3Mtpa of nickel; and 263,000 tons annually of cobalt. But easily mined sources of these minerals were running out, Glasenberg said. The remaining resources often faced geological issues, were located in areas of growing sovereign risk and increasing costs of capital were likely to restrain supply growth.
Lifting global living standards to those of the developed world will require two-and-a-half times the current copper utilised today, Glasenberg said. That meant the global stock of copper would have to rise from 173Mt to 601Mt. By 2050 the world population is expected to be 2.4 billion greater than 2015 levels.
But most of the world’s copper and cobalt deposits are located in poor countries, which present a range of risks including poor infrastructure, poor governance, resource nationalism and militant local communities. “Rising resource nationalism will be a significant risk to mining companies in the coming years,” Fitch Solutions Macro Research said in a mining industry trend analysis on May 7.
More radical calls for faster global decarbonising would vastly increase the amount of copper required
“The regulatory space in the mining industry is ever changing, with more governments looking to demand greater returns from the natural resources sectors in their jurisdictions. Mining companies often operate in developing countries subject to shifting political environments.”
The most obvious example is the Democratic Republic of Congo (DRC), which has almost half of the world’s cobalt reserves.
The list of issues that Glencore has had to tackle in the DRC in the last couple of years includes US sanctions on controversial mining entrepreneur, Dan Gertler, who was due to receive payments from Glencore in relation to mining royalties he had bought from state-owned mining company Gecamines, and threatened to seize Glencore assets if he was not paid. There were more threats from Gecamines over the recapitalisation of Katanga, as well as the introduction of a new and more onerous mining code.
Glencore is facing investigations by both the US Commodity Futures Trading Commission into whether it has violated regulations by engaging in corrupt practices, and the US Justice Department, into contraventions of the Foreign Corrupt Practices Act and US money laundering laws. Both investigations, which have similar scope, touch on its activities in the DRC.
Glencore set up its own investigations committee in July 2018, chaired by Glencore chairman Tony Hayward, to oversee its response to the US Justice Department.
Glencore seems to be fighting a war on several fronts: climate change activism among some of its shareholders and financiers in Europe, as well as a completely different menu of demands in the countries where it mines.
All these demands raise the barrier for new entrants as well as the minimum price necessary to incentivise Glencore or anyone else to continue extracting the minerals that the world needs.
GLENCORE’S decision to cap its coal output into the future in response to climate change concerns will deliver more than one benefit to the group in the long run.
Firstly, it makes Glencore more investible for a global financial community that is increasingly concerned about the effects of carbon emissions on global warming. Secondly, because Glencore is a major producer of premium-quality thermal coal, it is likely to push up prices for its product into the future, so it will make more money by mining less.
A sharp recoil by major global fund managers against fossil fuels is putting pressure on oil and coal companies to “clean up or we won’t invest”.
In the last 18 months there has been a series of announcements from various banks that they would no longer finance either new coal projects or coal-fired power stations, or both. These include not only the European Bank for Reconstruction and Development but also local banks: Standard Bank, Nedbank and FirstRand.
About 38% of the world’s electricity is generated from coal.
Most powerful of all is a group called Climate Action 100+, an investor initiative, launched in December 2017 with the intention of ensuring that companies are “minimising and disclosing the risks and maximizing the opportunities presented by climate change and climate policy”.
It has about 320 signatories, representing $33 trillion in assets under management, who include BNP Paribas Asset Management, BMO Global Asset Management, Calpers, HSBC Global Asset Management, M&G Investments and Investec Asset Management.
Anna Krutikov, Glencore’s head of sustainable development, said Glencore started substantive conversations about its climate change strategy in 2016 with the investor group that later became Climate Action 100+. These conversations helped Glencore to structure its approach towards climate change in its businesses.
Glencore announced in February, after discussions with Climate Action 100+, that it would limit thermal coal production capacity to about 150Mt/year. It mined 129Mt in 2018 and expects to produce 145Mt in the current year to June.
We are prioritising our capital investment to grow the production of commodities essential to the energy and mobility transition and which support the growing needs of a lower carbon economy
A general misconception emerged from some discussions with investors that Glencore was a coal company, whereas it is in fact a diversified business, Krutikov said. The intention is to use the profits from coal to invest in other businesses, such as copper and nickel, that will contribute to future forms of energy generation. However, coal still has a role to play in line with the UN Sustainable Development Goals to facilitate access to affordable energy in developing countries.
In Glencore’s latest annual report, it explained the risks attached to coal. These included government policies to introduce a low-carbon economy that could involve levies on emissions, increased monitoring and reporting costs and lower demand for energy products.
“A number of national governments have already introduced, or are contemplating, the introduction of regulatory responses to greenhouse gas emissions,” it said. “This includes countries where we have assets such as Australia, Canada and Chile, as well as customer markets such as China, India and Europe.”
These responses had other implications, in particular on the investor community.
“As a result of these factors, some other market participants and analysts have a more bearish view (some strongly so) in relation to coal and oil and believe that many fossil fuel assets could become stranded, i.e. no longer capable of operating for an economic return with the capital invested being irretrievably lost,” Glencore said.
“Some investors may not invest in our shares or divest their holdings due to our significant operations in fossil fuels. This is particularly relevant for us as the world’s largest producer of seaborne thermal coal and a significant marketer of fossil fuels.”
Apart from capping its coal production, Glencore is also taking other steps. It will ensure that future investments in coal have relatively quick pay-backs to mitigate “stranded-assets” risk. It has also committed to disclose its energy and carbon footprint and has a group-wide carbon emission intensity reduction target of 5% on 2016 levels by 2020.
It invests in various emission reduction projects and participates in public debates on carbon and energy issues where it “seeks to ensure that there is a balanced debate with regard to the ongoing use of fossil fuels”.
The group’s massive global mining and trading activities are heavily dependent on sea transport, whose consumption of heavy fuel oil contributes to global carbon emissions. Across Glencore’s fleet (both wholly owned and those in which it has an interest) the company has been working to optimise the fleet to help reduce carbon emissions, Krutikov said.
Glencore’s decision to cap production could also result in higher prices in the medium term, as supply of premium-quality thermal coal into Asia will prove inadequate to meet demand.
Industrialisation and urbanisation, particularly in Asia, is expected to continue to drive growth in demand for energy, electricity, steel and cement, for which coal is a key input. More than 50 gigawatts of new coal-fired power generation is being constructed in Asia-Pacific.
Despite the huge financial power of the Climate Action 100+ group, Glencore’s February commitment did not have any noticeable impact on share price performance. Since November, the shares have underperformed mining shares in general on the London Stock Exchange, as other heavyweight miners such as BHP and Anglo American have benefited from a rally in the iron ore price.