Cut and run or manage to closure? The BHP and Glencore models compared

With the announcement of BHP’s annual results on 17 August we witnessed BHP not only confirming it was getting out of thermal coal production but also oil and gas – what used to be one of “four pillars” of the company (along with iron ore, copper and coal). BHP appears to be cutting and running from fossil fuels.

In contrast Glencore, the world’s largest thermal coal producer in the international trade, says it will manage its coal mines to closure, within an overall goal of having net zero emissions in its operations – AND those of its customers – by 2050.

Today we are seeing thermal coal prices that, at US$170 per tonne out of Newcastle, are literally more than triple the prices of a year ago. Normally that would be called a boom, but there is no normal in coal mining any more. There is no rush to new thermal coal production, nor coking coal for that matter.

Despite the boom time coal prices, BHP downgraded the value of its large Mt Arthur thermal coal mine in the Hunter Valley even further. In the half yearly accounts earlier this year, BHP wrote down the value of Mt Arthur Coal from US$841m to US$288m. But in the results just announced, that value has been further downgraded to below zero – to a negative value of -US$289m.

If BHP managed to give away the mine for nothing, it would now book a $289m one-off “profit”! Some say this is BHP deciding that the rehabilitation/closure costs of the Mt Arthur site are bigger than previously acknowledged, and/or that it reflects the offers that have been received for the asset.

BHP is clearly seeking to offload Mt Arthur Coal as quickly as possible, and the current high thermal coal price is being regarded as a temporary phenomenon that does not affect the need to appease investors who are demanding that the company demonstrate its pathway to net zero emissions.

This has also included offloading its one third stake in the El Cerrejon mine in Colombia to fellow JV partner Glencore, in a complex deal already done but yet to complete.

So what of Glencore, headquartered in Switzerland but with its primary stockmarket listing in the UK?

Glencore produced almost 49 million tonnes of coal in the first half of 2021, mostly thermal coal and mostly for international markets. This is a huge volume, but significantly down on the 58mt produced in the first half of 2020. Australian thermal coal exports were cut from 29.4mt to 25mt. Glencore is seeking to maintain good prices by curtailing production. It’s a big enough player to do that. (Though most of the current coal price hike is due to international markets expensively re-arranging themselves to accommodate China’s blanket ban on Australian coal.)

Glencore said earlier this year that it would reduce emissions – its own AND those of its customers – by 40% by 2035 and 100% by 2050. Which leaves very little room for coal in coal-fired power stations!

It says coal is a declining part of its portfolio but “we will continue to operate our mines until they reach the end of their lives”.

So BHP will be out of thermal coal probably this year, while Glencore will be substantially out by 2035 and probably entirely out by 2050.

But if BHP is divesting from fossil fuels, why is it remaining as the world’s largest producer of coking coal in the international market? BHP just says that coking coal remains a core asset. Glibly it might be said that coking coal is not a fossil fuel as it plays a chemical role in the making of iron and steel. But BHP faces the problem that investors are requiring companies to state what carbon risk exposures they have, and how they will manage them in a world seeking to achieve net zero emissions by 2050. This exposure goes beyond the emissions from direct operations including energy use; it extends to the emissions of its customers. And because BHP is one of the world’s largest iron ore producers as well as the largest exporter of coking coal, it has explain the emissions from the making of iron and steel whether it divests its coking coal assets or not.

So BHP is going to be looking for ways to reduce emissions from making iron and steel. It is already in three pilot projects with major steel producers. Are these projects just “being seen to be doing something” or is BHP really looking for way to reduce the use of coking coal in steelmaking?

Peter Colley
National Research Director

Back to issue: August 2021