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Miners face up to climate challenge

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The world’s biggest exporter of thermal coal makes for an unlikely eco-champion. Yet that is how Glencore is seeking to position itself.

The London-listed company stole a march on its rivals in December with new targets that will make it the first miner to be fully aligned with the goals of the Paris agreement on climate change.

By 2050 Glencore is aiming to be carbon neutral — including the carbon dioxide generated when customers burn or process its raw materials. 

These “Scope 3” emissions are emerging as a huge challenge for the industry, particularly miners that produce commodities for hard-to-abate sectors such as steelmaking, which accounts alone for about 7 per cent of global greenhouse gas emissions.

Accounting for 95 per cent of the mining sector’s overall emissions, according to Barclays, a clear strategy to tackle them will be crucial for the sector wants to attract investment from fund managers who are themselves facing pressure from regulators and clients to make sure the assets they hold are aligned with the Paris deal.

Without a credible path to carbon neutrality, big miners will struggle in their efforts to present themselves as vital in the shift to a green economy through their production of energy transition metals — copper, cobalt, nickel and zinc.

Lollipop chart showing global miners emissions reduction targets for selected companies

“Scope 3 emissions often account for the largest portion of a company’s overall greenhouse gas footprint. They simply cannot be ignored or written off as too difficult,” said Stephanie Pfeifer, chief executive of the Institutional Investors Group on Climate Change and a steering committee member of Climate Action 100+, an influential investor group that has more than $52tn of assets under management.

“Those companies that continue to sidestep the issue can expect to face increasing scrutiny from investors.”

All of the big miners have set targets for carbon neutrality. Anglo American intends to reach net zero emissions by 2040, while BHP and Rio Tinto are aiming at 2050.

But those targets do not include Scope 3 emissions. Rio and Anglo have not even disclosed their end-use emissions for 2019, while BHP publishes a range to reflect the potential double-counting of coking coal and iron ore, the two ingredients needed to make steel in blast furnaces.

Miners' exposure to transition commodities

Only Glencore and to a lesser extent Vale, the world’s biggest iron ore producer, have set Scope 3 goals.

Vale is targeting a 15 per cent reduction in Scope 3 emissions by 2035 through the use of carbon offsets, eco-friendly shipping and partnering with its customers on low-carbon steelmaking technology.

“If you really want to lead . . . on climate change you really have to set bold goals on Scope 3,” said Vale chief executive Eduardo Bartolomeo.

Glencore is aiming to cut its total emissions by 40 per cent over the next 15 years with the ambition of reaching carbon neutrality by 2050. Glencore does not count the third-party commodities bought and sold by its powerful trading arm in its target.

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here 

It plans to do this primarily by running down its Colombian and South African coal assets so that by 2050 most of its reserves will be depleted with only some of its Australian mines — utilising carbon capture and storage technology — still in operation. The cash harvested from these operations will be reinvested in energy transitions metals.

The company, which faces a number of other environmental, social and governance (ESG) challenges, is hoping its targets will it more investable for funds with absolute coal exclusion thresholds, although if the pressure gets too much its outgoing chief executive Ivan Glasenberg says it would be prepared to spin off the business.

As for Anglo American, BHP and Rio, analysts say their reluctance to commit to Scope 3 targets is understandable if increasingly difficult to justify to the investment community.

Unlike Glencore they are all big producers of iron ore, the key ingredient needed to make steel. As such, most of their Scope 3 emissions are generated by customers such as Chinese state-owned steel mills, over which they have little control.

Scope 3 emissions are the mining industry’s biggest challenge

Analysts at Jefferies put Rio Tinto’s Scope 3 emissions at 491m tonnes of CO2 equivalent and BHP’s at 448m. This compares with their operational emissions of 26.8m and 15.8m tonnes respectively.

Rio and BHP are seeking to address Scope 3 emissions by working with big steelmakers on the development of new low-emission technologies that are not yet viable at scale, mainly because of the costs involved.

BHP has set aside $400m for climate projects and is seeking to help develop technologies and approaches to make steelmaking 30 per cent less carbon intensive and shipping 40 per cent less carbon intensive by 2030.

Rio recently announced plans to invest $10m with China Baowu, the world’s largest steel producer, over the next two years on low-carbon steelmaking projects and research. Critics point out $10m is tiny fraction of the more than $10bn Rio generated in underlying earnings last year.

Anglo American, which has a big footprint in South Africa and South America, says it needs to do more work before it can set Scope 3 targets. That is because many of its customers and host governments “can’t give answers yet” on their net-zero pathways, according to its chief executive Mark Cutifani.

“I am not being critical of Vale or Glencore . . . I applaud them for taking a view,” he said. “But from our point of view there is more work to be done. For us to come out with targets that are credible, it has to involve both our stakeholders and customers.”

But while investors are sympathetic to that argument, the moment is fast approaching when big miners will have to acknowledge Scope 3 emissions and put in place targets that are sufficiently ambitious, according to Adam Matthews, director of ethics and engagement at the Church of England Pensions Board and co-chair of the Transition Pathway Initiative.

“We absolutely recognise that Scope 3 emissions are challenging and miners are not in control of their customers,” said Mr Matthews. “But they must still devise strategies to mitigate and reduce those emissions. I think companies that do that will carry the confidence of investors.”



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Vale chief rejects talk of iron ore supercycle

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Iron ore is not on the cusp of a new supercycle, according to the head of one the world’s biggest mining companies, who expects demand for the steelmaking ingredient to flatten out after a couple of years of the current tightness.

Eduardo Bartolomeo, chief executive of Brazil’s Vale, said the record surge in iron ore prices over the past year was very different to the boom of the early 2000s, which was driven by China’s rapid industrialisation. 

“In the last supercycle we had urbanisation in China. It was a structural change. A shock in demand,” he told the Financial Times. “We are not talking about a huge shock in demand now. I would say it is marginal. It is not a shock.”

But he added that, with big global economies revving up and iron producers running at or near capacity, prices could remain elevated until 2023.

“Although there is strong talk about cuts, production is still going up in China and now you have Europe coming back and the US announcing a huge stimulus package. There are also restrictions on supply,” he said. “This market is going to be tight for a while. At least two years.”

Iron ore has spearheaded a broad-based rally in commodities over the past year, rising more than 150 per cent to a record high above $230 a tonne last week, mainly on the back of strong demand from steel mills in China, before paring gains and hitting $209.35 on Friday.

As China’s steel production continues to expand analysts believe prices can remain around current levels but say the market will be highly volatile.

Iron ore’s turbocharged performance has been a boon for big producers including Vale, which require a price of only about $50 a tonne to break even.

It has fanned talk of a new commodities supercycle — a prolonged period where prices remain above their long-term trend, usually triggered by a structural boost to demand to which supply is slow to respond.

Following a deadly dam disaster two years ago that killed 270 people, mainly company employees and contractors, Vale was forced to curtail production.

Its output fell from a planned 400m tonnes a year to about 300m tonnes in 2019 and 2020, and the company lost its position as the world’s largest iron ore producer to Rio Tinto, which has managed to produce about 330m tonnes in each of the past two years.

Bartolomeo said Vale eventually needed to increase production to 400m tonnes because iron ore was a “high fixed-cost business”. However, he said the company would do so in a “very paced way”, mindful of safety.

Erik Hedborg, analyst at the CRU consultancy, said Vale’s journey to 400m tonnes would take time because it required the “restart of many mines, which will go through several complex licensing processes”.

Over the medium term — from 2025 to 2030 — Bartolomeo said Vale expected diminishing demand for iron ore from China because of increasing use of scrap in electric arc furnaces.

“Everybody talks about the circular economy. Scrap is going to come to China. It has to. We see it diminishing demand for iron ore from China.”

Bartolomeo said there would also be a shift to higher-quality iron ore as the steel industry sought to reduce emissions by moving to less polluting methods of steelmaking such as hydrogen-based production.

“All the roads lead to high-quality iron ore and Vale is very well positioned for that,” he added. 



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US banks could cut 200,000 jobs over next decade, top analyst says

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US banks stand to shed 200,000 jobs, or 10 per cent of employees, over the next decade as they manoeuvre to increase profitability in the face of changing customer behaviour, according to a banking analyst. 

“This will be the biggest reduction in US bank headcount in history,” Wells Fargo analyst Mike Mayo told the Financial Times. If his forecast bears out, this year would mark an inflection point for the US banking sector, where the number of jobs has remained roughly flat at 2m for the past decade.

The jobs most at risk are those in branches and call centres as banks prune their sprawling networks to match the new realities of post-pandemic banking, Mayo’s report found. That is consistent with Department of Labor statistics that predict a 15 per cent decline in bank teller jobs over the next decade.

Historically, lay-offs, particularly for lower-paying jobs, have been a contentious issue for the banking industry, which is often held up by progressive politicians as an example of a wealthy industry prioritising profits over people.

But the threat of technology companies and non-bank lenders chipping away at the business of payments and lending, which have traditionally been dominated by banks, has intensified over the past year, making job cuts necessary, Mayo said.

“Banks must become more productive to remain relevant. And that means more computers and less people,” he said.

Most of the reductions can be achieved through attrition over the next 10 years rather than cuts, reducing the risk of a backlash, Mayo said.

The new research, reported first by the FT, comes on the heels of disappointing jobs data that showed the US economy added just 266,000 jobs last month, sharply missing estimates of 1m. Structural elements of unemployment like accelerated automation that took place during the pandemic could pose stronger than anticipated headwinds to a recovery in the labour, economic officials said following the report. 

Pandemic activity pushed headcount up roughly 2 per cent last year as banks hired staff to meet the sudden demand for labour-intensive mortgages and government-backed small-business loans. But that trend is likely to be reversed in the near-term as lenders refocus on efficiency to compete more effectively with technology companies that increased their share of business during the health crisis. 

Increased competition from unregulated companies such as PayPal and Amazon entering financial services was one of the principal concerns JPMorgan Chase chief executive Jamie Dimon outlined in his annual letter to shareholders last month. 

Mayo estimates that banks currently represent just a third of the overall financing market.

“Digitisation accelerated and that played to the strength of some fintech and other tech providers,” Mayo said. 

Many of the bank branches that were closed during the pandemic will probably stay that way, and even those that remain open are likely to be more lightly staffed as branches become more focused on providing advice than facilitating transactions. A large amount of back-office roles also stand to be automated but those numbers are harder to quantify, the report said. 

Mayo said his team 20 years ago was twice as large and responsible for half as much. Doing more with less was the new norm across the industry.

“If I was giving advice to my kids, I’d say you probably don’t want to go into the financial industry,” Mayo said, adding that technology and customer or client-facing roles are probably the only areas that will see growth. “It’s likely to be a shrinking industry.”



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Inflation wild card unsettles markets

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Regime changes usually take a while to fully register among investors. The big talking point in markets at the moment surrounds the potential return of a more troublesome level of consumer price inflation and what protective action investors should take.

The underlying trend of inflation matters a great deal for financial markets and investor returns. The rise in both equity and bond prices in recent decades has occurred during a long period of subsiding inflation pressure and from recent efforts by central banks to arrest disinflationary shocks since the financial crisis. 

A year after the global economy abruptly shut down, activity is duly picking up speed. The logical outcome has been a surge in readings of inflation and this week, a measure of US core prices recorded its largest annual gain since 1996, running at a pace of 3 per cent*.

Core readings exclude food and energy prices and are deemed a smoother gauge of underlying inflation pressure, a point that many people outside finance find baffling when budgeting the cost of groceries and petrol.

So the significant jump in the core measure, and even accounting for the base effect of the pandemic’s brief deflationary shock a year ago, has understandably generated plenty of noise.

This will remain loud in the months ahead as activity recovers from lockdowns with a hefty tailwind of fiscal stimulus working its way through the broad economy.

But muddying the waters for investors is that the outlook for inflation is still difficult to judge at this stage.

“There is so much dislocation in the economy from the reopening and base effects from a year ago that it will take at least six to 12 months before we get a clear view of the underlying inflation trend,” said Jason Bloom, head of fixed income and alternatives ETF strategies at Invesco.

Investors who are now worried about an inflation shock face a dilemma. Some assets seen as traditional hedges against such a risk, like inflation-protected bonds and commodities, have already risen appreciably. Effectively a period of inflation running hot has been priced in to some degree.

And history does provide a cautionary note for those moving late to buy expensive inflation protection.

Past inflationary alarms, as economies recovered in the wake of the dotcom bust in the early 2000s and the financial crisis of 2008, proved false dawns. After a mercifully brief pandemic recession, the powerful and well entrenched disinflationary trends of ageing populations and falling costs associated with technological innovation are by no means in retreat.

For such reasons, a number of investors and the US Federal Reserve expect inflationary pressure this year will prove “transitory”. But stacked against deflationary forces is the immense scale of the monetary and fiscal stimulus of the past year.

The effects of monetary and fiscal stimulus means “inflation may settle into a pace of 2.5 per cent (annualised) and that would be different from the average of 1.5 per cent before the pandemic”, said Jason Pride, chief investment officer of private wealth at Glenmede Investment Management. “Inflation will be higher. At a dangerous level? No.”

In an environment of firmer growth and moderate inflation pressure, equities will benefit, led by companies that have earnings more influenced by the economic cycle. Investors also will seek companies that have the ability to pass on higher prices to customers in the near term and offset a squeeze on profit margins.

Still, a troublesome period of elevated inflation cannot be easily dismissed. The “transitory” argument could be challenged if economic growth continues to run hot into next year, accompanied by a trend of higher wages from companies finding it hard to attract workers.

Before reaching that point, expected inflation priced into the bond market may well push past the peaks of the past two decades and enter uncharted territory in the US and also for other developed markets in the UK and Europe.

Bond market forecasts of future inflation pressure over the next five to 10 years have already risen sharply in recent months. But the rebound is from a low level and for now, expected inflation is not far beyond the Fed’s long-term target of 2 per cent.

“It is the change in inflation expectations that drives asset returns,” said Nicholas Johnson, portfolio manager of commodities at Pimco. Assessing almost 50 years of data, a portfolio holding equities and bonds underperforms during bouts of elevated inflation, while real assets including inflation-linked bonds and commodities prosper, according to the asset manager.

“Most investors have not experienced a period where inflation surprised to the upside,” added Johnson. Clients are asking more questions about insulating their portfolios, but their present exposure to commodities and other assets show that in broad terms investors are “not paying much of an inflation premium”.

That can change and the prospect of inflation regime change remains a wild card for investors.

michael.mackenzie@ft.com

*The value of core inflation has been changed since first publication.



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