So where does God come into any of that?
Well, as it turns out, the Church of England – a rich investor in its own right – has played an influential role in taking the message of Paris and climate change mitigation directly to Glencore.
The end result of this sustained climate diplomacy is a statement of carbon intent that limits further growth from a division that has absorbed at least $US3.5 billion of Glencore’s growth and sustaining capital over just the past two years.
To be clear on that, Glencore invested $US2.7 billion grabbing a lion’s share of Rio Tinto’s Australian assets and a further $US845 million on sustaining and expanding the company’s pre-existing local coal estate.
Strong investment case
The Rio deal effectively doubled Glencore’s Australian capacity, leaving it capable of producing something considerably better than the 104 million tonnes that the expensively expanded system will send to our region in 2019.
Glencore is a coal business of three arms, with operations in South Africa and Colombia and, all told, the company expects to produce 145mt this calendar year.
But the Glencore commitment revealed overnight Wednesday says that volume will be that. It also seems to say that Glencore will work to contain commentary by its own people and those who represent it that might be construed as negative to the Paris Agreement.
“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,” Glencore’s concession statement says.
“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,” it continued.
Glencore has also committed, among many things, to make more transparent account of its internal assessment of scope three emissions (that is, the carbon dioxide produced by the end user of its products) and to run a BHP-style review of the industry associations that count Switzerland’s global miner among its membership.
“Glencore believes that it is appropriate that we take an active and constructive role in public policy development and to participate in relevant trade associations,” the company said before setting firm new climate boundaries for its lobbies.
Glencore said it recognised “the importance of ensuring that its membership in relevant trade associations does not undermine its support for the Paris Agreement and the Paris Goals”.
“Glencore will consider whether its membership in relevant trade associations aligns with the company’s stated positions in this statement. The result of this review, including any material misalignments identified and action that will be taken, will be made public in 2019,” the company finished.
To be clear on all of this, it is just very hard to imagine that this was where Glencore wanted to go when it laid its very big bet last year on Australian coal growth.
As recently as last October sell-side analysts on a tour of Glencore’s new Hunter Valley domains appeared to be offered coal as a growth story. A slide pack laden with local and regional data predicted that surging Asian coal demand would mitigate erosion in Europe and America. Drawing on its own data and the International Energy Agency outlook, Glencore predicted net coal demand would rise by 20 per cent, or 965 millon tonnes, between 2016 and 2040.
Glencore then noted that the supply-side response to this projected demand surge had been muted, observing that since 2014 the annual growth investment in Australia – the home of the region’s best coal – had run at circa $4 billion annually.
Management also indicated confidence that it would further reduce an already highly competitive cost base and assessed that the business would generate $US6.2 billion in EBITDA annually based on prevailing prices and steady state production.
Glencore’s tourists were advised that the new business offered a wealth of potential brownfield growth opportunity given appropriate demand and price incentive.
Now what we are hearing is that coal will struggle to secure investment in anything but sustaining the existing business. It is suggested that even investment that aims to replace the tonnes from, say, Clermont and Liddell, mines which will be exhausted within the next five to seven years, will be hard to justify.
Now, at one level, Glencore’s embrace of the cap as a concession to the climate challenge might be received as both sensible and self-serving.
Few mainstream majors are as wedded to a supply-side deficit as Glasenberg. In October Glencore indicated that Australia’s response to price signals had been cautious. And regional customers have already expressed some concern over the grip on the top end of the Newcastle coals that the Rio deals have delivered Glencore. Now this climate deal will leave Glencore with no choice but to sit on its hands even if thermal prices run stronger for a lot longer.
But whatever this might mean for Glencore, the optics of this concession statement are gloomy indeed for Australian coal generally and the thermal sector in particular.
As a nation that is weaning itself off coal generation faster than many imagined was possible, Australia is finding it increasingly difficult to live with our carbon paradox. How can we export coal that will only add to the global climate woes?
Taken angry exception
Not two weeks ago a judge of the NSW Land & Environment Court decided that global emissions mattered more than national income. Judge Brian Preston knocked back a coal development in the Gloucester Valley first because it was far too close to a town that did not want it but second because it would make an unwelcome, if very small, addition to global emissions of carbon dioxide.
The addition of scope three emissions to the agenda of local planning decisions is something new and something not demanded by Australia’s external treaties. It is hard to imagine that this decision will stand. But Preston’s logic reflects the inner urban vibe.
But this vibe is not universal. As The Australian Financial Review revealed on Monday, the most powerful state branch of the coal union has taken angry exception to the idea that there might be any sort of “just transition” away from coal.
Leaked minutes from a December board meeting of the Queensland branch of the CFMEU Mining and Energy Division signalled a split with the Labor Party over jobs. The union has subsequently pushed the button of division in announcing it will require targeted Labor candidates for the next federal election to offer commitment to support Adani’s Carmichael coal mine.
Then, just 24 hours before Glencore’s concession landed, Australia’s other very big coal producer, BHP, told shareholders that it was not ashamed of its exposure to coal mining and it was content to hold on to its two purely thermal coal assets “for now”.
That little addendum says everything about the uncertainty that has quite suddenly enveloped Australian coal. I have little doubt that the sector will continue to make a lot of money for decades to come. But just who will make that money, well, only time will tell. Because successive statements of subtly curbed intent by two of the world’s biggest producers hint at the potential that coal might one day very soon not be the right commodity for listed multinational miners.