Glencore Plc’s first-half results were pretty much as expected. The balance sheet is in much better shape and rising commodity prices mean there's lots of cash. So how could the mining and commodity trader grab investor attention?
Thanks in part to Elon Musk’s Tesla Inc, there are few better ways to woo the market than to hop on board the electric bandwagon. BHP Billiton Ltd. played that game this week. And on Thursday Glencore CEO Ivan Glasenberg had the following to say:
"The potential large-scale roll out of electric vehicles and energy storage systems looks set to unlock material new sources of demand for enabling underlying commodities”
Not the punchiest sentence, but you get the point. Glencore is well-placed in copper, nickel and cobalt, crucial ingredients for electric car batteries. Glencore has about a one-third share of the cobalt market, a lucky consequence of its big copper and nickel assets (cobalt's a by-product). Glasenberg thinks electric vehicle sales could trigger a cobalt supply squeeze, which would lift prices and cash flow. Meanwhile, copper demand should benefit too from the rise of wind and solar.
Glasenberg's electric excitement jars though because thermal coal will probably account for more than one-quarter of Glencore's Ebitda at current prices. While the company insists its coal is "cleaner" than other sources because of lower ash and sulphur, it still unleashes plenty of planet-warming emissions.
Plus Glencore is expanding in coal. Last month it agreed to pay $1.1 billion and royalties for a stake in an Australian coal mine. There's plenty of firepower for similar deals: annual Ebitda could hit $15 billion so long as commodity prices remain steady.
Looked at charitably, you’d say Glencore is hedging its bets on climate change. Another, perhaps more accurate view, is that it plans to have its cake and eat it.
Indeed, Glencore’s views on the subject make pretty depressing reading. Last week, a senior executive urged Australia to prioritize energy security and prosperity over cutting emissions. Although the company expects coal's share of the world's energy supply to decline in future, overall demand for coal by volume will keep rising in Asia, it thinks. This is from its climate change considerations report published this year:
"We believe there is a significant gap between the energy reality and the various carbon policy scenarios... produced by some commentators based on policy statements. Unless all parties acknowledge the energy reality that fossil fuels will continue to be a part of the global energy mix for decades to come and put greater effort into supporting emission reductions from fossil fuels, the 2°C degree goal will not only be unachievable but it will also be unaffordable."
In other words, Glencore doesn’t think its coal reserves will become stranded. If anything, it expects electric vehicles to lift demand for baseload electricity generation, i.e. more coal. So we better all hope carbon capture and storage proves viable on a large scale. Plenty of folk worry it won't be.
Glencore's climate pessimism isn't unique. The International Energy Agency doesn't think the world's on track to limit warming to less than 2°C either. And in fairness to Glencore, burning fossil fuels has stimulated growth in developing countries, lifting millions out of poverty. So it might argue, like Goldman Sachs's Lloyd Blankfein, that it's doing God's work.
Still, anyone wowed by Glencore's electric talk should know what's feeding the beast.
Peter Grauer, the chairman of Bloomberg LP, is a senior independent non –executive director at Glencore.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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