• August 16, 2021

Faced with fight or flight, BHP chooses to flee

BHP faced the prospect of continuing to invest heavily in an industry with limited long-term growth prospects; one that carries a baggage of reputation and that does not provide the benefits it once offered or that will not be charged while it can still attract a decent price.

Therefore, there are several reasons why BHP would consider abandoning a sector that has been an important core element of its portfolio since oil and gas was discovered in the Bass Strait more than half a century ago.

The more general motivation to quit coal, oil and gas may seem obvious in a decarbonized world where investors are increasingly avoiding carbon-intensive companies. However, BHP and Rio’s decision to flee carbon-intensive sectors is at odds with the strategy of one of their peers. While they were selling or trying to sell, Glencore bought.

Surprisingly, despite expanding its coal portfolio in recent years, most recently by pulling BHP and Anglo American out of Cerrejón, Glencore has not faced backlash from its shareholders, ESG investors or environmental groups.

That’s because last year former CEO Ivan Glasenberg and his anointed successor and later head of the coal business, Gary Nagle, did something smart.

They committed Glencore to reducing their carbon emissions to zero by 2050, primarily simply by allowing mines to be depleted until resources are depleted to the point of closure.

There would be no existing mine expansions to offset depletion, Glenore’s total emissions would be reduced by 40 percent (relative to 2019 levels) by 2035, and its ambition would be to achieve net zero emissions by 2050.

That strategy is ingenious because it disarmed environmental groups and ESG investors without hurting Glencore’s prospective profitability.

For those who are not caught by the nature of their operations in a struggle to maintain them, the simplest decision, and the one that BHP seems to be close to exercising, is to take the flight option while it remains open.

The world’s largest seaborne coal group had provided a template that they used to learn how carbon-intensive companies should respond to climate change.

Previously, activism aimed to pressure companies with carbon-intensive portfolios to sell by cutting off their access to debt and, increasingly, ESG-sensitive stocks.

However, at the high end of the resources sector, that created the likelihood that responsible companies with reputations and other assets to protect would simply sell their most controversial assets to those who weren’t concerned about reputational impacts or were committed, like Woodside. , to the particular merchandise. The acquisition of BHP Petroleum will make Woodside a global player in the industry.

Glencore and former CEO Ivan Glasenberg provided a template they leveraged on how carbon-intensive companies should respond to climate change.Credit:Bloomberg

Exercising the flight option means that assets are shifting from a company that is less likely to invest in expanding production to one in which it is almost inevitable that it will invest and expand production to meet the continuing demand for coal and oil. increasing and probably will. So for decades to come, China and India, in particular, continue to industrialize.

Glencore has provided an example with its commitment to depleting its reserves.

Earlier this month, the environmental activist group Market Forces asked BHP to abandon its plans to sell its more carbon-intensive assets and instead reduce its production. Activists have come to realize that divestment simply crowds out latent emissions and is likely to increase them.

The genius of Glencore’s position is that, as the dominant offshore coal group and the largest coal trader through its marketing business, it can make up for any loss in volume from its promise of allowing its resource base to grow. deplete through the impact of that price depletion. and / or by negotiating third-party volumes.

Last year, the price of Australian thermal coal plummeted after China imposed a ban in response to a series of perceived slights from Australian politicians. It fell to around $ 50 a ton.
Glencore responded by cutting Australian production, sourcing products for China from South Africa, Indonesia and Russia, and subsequently redirecting Australian coal to markets that those countries had supplied.


The reduction in Australian production was reflected in the 16 percent drop in Glencore’s coal volumes in the first half of this year, but prices have soared to near-record levels (they have been above $ 170 per tonne). ) and have prepared the company for the future. exceptional second half, and coal is expected to generate close to $ 6 billion in earnings before interest, taxes, depreciation and amortization this year.

Glencore is unique in the scale and combination of its mining and commercial activities, and therefore its strategy of refining volume and price in that range of activities is difficult for others to replicate without sacrificing profit and value.

For those who are not caught by the nature of their operations in a struggle to maintain them, the simplest decision, and the one that BHP seems to be close to exercising, is to take the flight option while it remains open.

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