Commodities adapt to climate change

16 March 2020

Coal and oil account for most carbon emissions. Producers are under pressure from environmentalists to seek greener ways to make steel and generate energy. Carbon pricing is one way to reduce the commodity sector’s footprint.

Environmental and climate-change developments are emerging as structural factors influencing global commodity markets. Extreme weather, natural disasters, biodiversity loss, climate-action failure and human-made environmental disasters are increasingly concerning governments, businesses and the public.

For commodity producers, these issues are critical. Fossil-fuel energy use accounts for two-thirds of global emissions – 36 gigatonnes of CO a year. All other sources of carbon emissions – including industry, agriculture, transport, land-use change and forestry – emit only 21 gigatonnes.

Carbon emissions from energy production have risen by 41 per cent since 2000. Coal still accounts for 44 per cent of the total and oil another 35 per cent. A fall in coal emissions in 2019 has been largely offset by increases from oil and natural gas.

Several oil producers have announced plans to cut the carbon intensity of their energy supply mix or even to become net CO neutral over coming decades. Many major banks and investors are saying they will divest from companies with a large exposure to coal. That could limit investment capital raised by the sector.

Yet coal-fired electricity generation still accounts for around 25 per cent of all global carbon emissions and there are 2,425 coal-fired power stations globally. Some 48 per cent of these are in China, 13 per cent in the US and 11 per cent in India. Another 385 plants, mainly in China, are under construction.

Demand for thermal coal is thus expected to remain broadly steady. Falling coal consumption in the OECD economies, led by Europe, will be largely offset by higher consumption in India.

Coking coal, meanwhile, which is used in steel production, accounts for around 8 per cent of global carbon emissions. With no viable alternative, these carbon emissions remain a challenge. Steel demand seems set to keep increasing: while China’s growth will be less construction-oriented, other emerging economies, including India and Indonesia, will fill the gap.

Steel producers can nevertheless mitigate their carbon emissions through recycling, reducing stocks, and better energy efficiency.

Coal and steel are far from the only commodities likely to be influenced by climate factors. Prices of commodities such as lithium and cobalt, for example, which are used in making batteries, have been depressed by increased supply and the recent impact on sales of electric vehicles caused by coronavirus and global trade tensions. However, the environmental agenda should support future demand.

A comprehensive carbon pricing mechanism could help reduce emissions while balancing growth objectives. Carbon pricing has been a key part of the UN Framework Convention on Climate Change since its inception in 1992 but only 20 per cent of global greenhouse-gas emissions are currently covered by carbon pricing – and less than 5 per cent are priced at a level consistent with achieving the temperature goals of the Paris Agreement.

In the absence of a comprehensive carbon price, alternatives are being sought, including consideration by the European Union of a carbon border tax to level the playing field between countries with strong mitigation schemes and those without. If implemented, this could have implications for many commodities producers – including pressure to increase disclosure on their carbon footprint, or rising costs – in years to come.

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The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Paul Bloxham

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