Coal’s comeback pays off for hedge funds

Hedge funds including Third Point, Makuria Investment Management and Odey Asset Management have reaped a windfall from coal’s renaissance as they embrace a fossil fuel that many investors have shunned in the battle against climate change.

The shares of coal-mining groups have soared as the price of thermal coal has more than tripled in less than two years, propelled by the energy crisis and Russia’s invasion of Ukraine.

Despite coal prices coming off their recent high, the fuel’s resurgence — and the record profits miners are making — is deepening the debate among investors over the approach they should take to the fossil fuel. Coal is the single biggest contributor to carbon-dioxide emissions from the energy sector.

Many say owning coal stocks undermines efforts to combat climate change, and some have exited the commodity entirely. Others argue that the shift to green energy will take decades and that coal is an essential fuel during that process.

“The transition to green energy will not happen overnight,” said Petra Dismorr, chief executive of consultancy NorthPeak Advisory. “This has raised a divide for many allocators” in assessing which stocks they can or cannot buy, she added.

Daniel Loeb’s Third Point and Odey Asset Management are among a number of funds that chose London-listed Glencore, the world’s most profitable coal company, as a way of benefiting from demand for the fuel. Glencore shares are up more than 40 per cent since the start of last year and trading near a record high.

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Loeb told investors late last year that Glencore’s coal operations “put it on the ‘do not buy’ list for a lot of people, but this business right now is generating substantial cash flow given the global energy crisis — and substantial is probably an understatement”, according to documents seen by the Financial Times.

Glencore is not the only miner to emerge a winner. Profits at the world’s 20 biggest coal miners tripled last year to more than $97bn, with Glencore earning $13.2bn in the 12 months to June 2022, and China Shenhua making $12.2bn.

Among the shares that have outperformed since the start of last year are Whitehaven Coal, up about 200 per cent, and Peabody Energy, which has surged more than 150 per cent. The MSCI World Index has fallen 14 per cent in the same period.

Also profiting from Glencore is James Hanbury, fund manager at Odey, whose Brook Absolute Return Focus fund gained 22.8 per cent last year, with 3.4 percentage points of that gain coming just from Glencore, according to investor documents.

“Its earnings were helped enormously by the price of coal”, Hanbury wrote in an investor letter this month seen by the FT, adding that the strong cash flows generated by the business were attractive. Glencore was the seventh-biggest equity holding in his fund at the start of this month. Odey declined to comment.

Third Point told investors that it expected Glencore to generate a “windfall” of 40 per cent of the company’s market capitalisation — which would equate to about $30bn in cash — from its thermal coal business through to 2024. Third Point declined to comment.

The coal industry was defying predictions of its imminent decline even before the Ukraine war as the challenge of executing a rapid transition to cleaner energy has become clearer.

Despite agreements at UN climate summits to “phase down” coal, usage rose 1.2 per cent last year to a new record high, according to the IEA.

Coal is still used to produce more than one-third of the world’s electricity, and is the primary source of power in fast-growing economies such as India, China and Indonesia. Even in Europe, which aims to cut emissions by 55 per cent by 2030, coal has made a comeback because of the squeeze on Russian gas supply.

Germany, for instance, whose coalition government includes the Green party, has extended the life of its coal-fired power stations to avoid a potential energy crisis. In December the UK gave the go-ahead to the first new coal mine in 30 years.

Many campaign groups have called for investors to exit coal entirely. “Coal’s day has long passed,” said Charlie Kronick, Greenpeace UK’s climate finance adviser. “These dinosaur financiers need to invest in 21st-century tech, not bet on prolonging the coal age.”

Those investors putting money into coal also contend that it will be needed for years to come because of a lack of storage capacity for energy from renewable sources.

Mans Larsson, founder of London-based hedge fund Makuria, says that investors who try to force large companies to sell their coal assets risk pushing those mines into the hands of less environmentally responsible owners who are harder to hold to account.

“The world doesn’t have enough renewables and the energy transition is going to take much longer [than people think]. It’s not practical to be carbon neutral today unless we all radically change our lifestyles,” said Larsson, who says that coal assets are “almost completely underinvested”.

“It’s almost immoral not to invest in coal because of the reliance [by so many countries] on fossil fuels,” he said.

Buoyed by bets on coal stocks, Makuria gained 43.5 per cent last year while the S&P 500 fell 19 per cent. The fund owns positions in Glencore, Whitehaven Coal and Teck Resources, a producer of copper, zinc and metallurgical coal.

While some investors have discarded the fossil fuel altogether, others remain invested but say they are actively engaging with mining groups on their plans for the businesses, including eventual exits.

“In any Paris-consistent scenario, the outlook for thermal coal is extremely challenged,” said Nick Stansbury of UK-based Legal & General, which holds about 1.5 per cent of Glencore. “That is incontrovertible.”

You are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.

Legal & General is pushing the company on its coal strategy and it was a sponsor of a shareholder resolution calling for more disclosure on the group’s plans that will be voted on at Glencore’s upcoming general meeting.

At Glencore’s last AGM, 24 per cent of shareholders voted against its climate strategy, triggering a consultation process, the results of which will be published this spring.

The company plans to cut its direct and indirect emissions by 15 per cent by 2026, and by 50 per cent by 2035, compared with 2019 levels. Glencore will cap coal production at 150mn tonnes per year, up from about 110mn tonnes this year, and has announced plans to close 12 of its coal mines by 2035.

As the clash among investors over coal’s future intensifies, some hedge funds are scaling back their exposure. In Europe, thermal coal prices have fallen 26 per cent since the beginning of this year after the winter in Europe has so far turned out to be milder than expected.

That could signal that, for now at least, the best of the coal trade is over, according to Barry Norris, chief investment officer at Argonaut Capital.

London-based Argonaut has made big gains from a stake in Glencore over the past two years, but has recently hedged this with a short position — a bet that the price of a security will fall — on coal miner Thungela Resources.

“It’s become a seasonal trade. Coal is very geared to natural gas, which is very geared to the weather,” said Norris. “We’ve avoided an energy crisis [in Europe] this year, but we may not be so lucky next year,” he added.

Climate Capital

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

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here