Christopher Niesche: Australian coal producer Glencore to cap global output

We should not underestimate the significance of Glencore's announcement, Christopher Niche says. Photo / 123RF

COMMENT:

In an announcement that stunned both investors and miners, Australia's largest coal producer, Glencore, has pledged to cap its global coal output at current levels.

The Swiss-based resources giant, headed by billionaire Ivan Glasenberg, announced last Wednesday it would cap its global thermal and coking coal production at the current level of about 145 million tonnes a year after holding talks with climate activist investors.

The announcement was greeted with euphoria by the anti-coal lobby and hailed as the turning point on coal – a sign of a rethink among miners about their exposure to the highly-polluting sedimentary rock, which is also Australia's largest export.

It's certainly not the end of coal, but if we want to choose an event mark the beginning of the end, this is as good as any.

Glassberg was responding to pressure from climate lobby Climate Action 100+.

The group's members aren't activists in tie-died shirts and (highly-polluting) Kombi vans. Instead, they represent 300 institutional investors who between them manage US$37 trillion (NZ$54 trillion) in funds. Its Australian members include AustralianSuper, AMP Capital, Cbus, IFM Investors, QSuper and BT Financial Group.

Climate Action100 +'s mission is to improve climate governance, curb emissions of carbon dioxide and strengthen climate-related financial disclosures.

The 100 refers to a list of the companies the organisation rates as "systemically important emitters" and the + represents another 60 that are assessed as having "significant opportunity to drive the clean energy transition".

It doesn't just target coal miners, but heavy emitters across a range of sectors, including retail and manufacturing.

Along with BHP and Rio Tinto, 10 Australian companies are on the target list: Adelaide Brighton, AGL Energy, Boral, Qantas Airways, Santos, South32, Woodside Petroleum, Woolworths, Bluescope Steel and Origin Energy.

Institutional investment funds are responding to demands from their retail customers that their money is deployed in a sustainable way. Millennials, in particular, want to make investments that not only don't contribute to global warming or rely on modern slavery, but which are being used as a force for good.

Glencore said it was responding to the demands from Climate Action 100+ and explained its move thus:

"To meet the growing needs of a lower carbon economy, Glencore aims to prioritise its capital investment to grow production of commodities essential to the energy and mobility transition and to limit its coal production capacity broadly to current levels.

"To deliver a strong investment case to our shareholders, we must invest in assets that will be resilient to regulatory, physical and operational risks related to climate change."

Despite the edict from the company, only last year Glencore paid Rio Tinto $US1.7 billion for the Hail Creek coking coal mine in Queensland after Rio decided it no longer wanted to be in coal mining. The year before, Glencore paid US$1.26b for a 49 per cent share of Rio's Coal & Allied thermal coal operations in NSW's Hunter Valley.

In short, the Glencore conversion comes after a US$3b splurge on what are considered to be among the world's best coal assets. And just three months ago, Glencore outlined its own expectations demand in Asia would more than double by 2040.

Higher demand and a capping of supply can only mean one thing for commodity markets – higher prices. And there is nothing in Glencore's commitment that stops it replacing poor quality or declining coal mines with new mines, as long as their total output remains under the cap.

It looks like a very clever move by Glasenberg, which will help improve Glencore's reputation at the same time as it underpins its coal profits.

Nonetheless, regardless of whether Glencore's motivations were pure or were a calculated PR stunt and slight of hand, we should not underestimate the significance of its announcement.

Here we have a global mining giant bowing to pressure from green-focussed investors.

The end of coal won't happen quickly – even after its commitment Glencore will still be able to produce huge amounts of the stuff for decades thanks to its Rio Tinto acquisition – but it's underway.

In the coming years, we will see more funds divest of coal assets and from companies which burn coal, more banks will refuse to lend to coal mines and power plants, and more insurers will refuse to provide coverage for mining projects and thermal generators.

All of this will push up costs and make coal and coal generation more expensive. Building new renewable energy sources such as wind and solar is now cheaper than building a coal-fired generator in many countries, including Australia, and decisions like Glencore's will only hasten this trend and the ultimate end of coal.

Global coal shipments topped 1 billion tonnes for the first time in history last year. This may not prove to be a peak, but ultimately the only way is down.