Why This Billionaire Still Believes in Coal

As climate change has become an increasingly hot topic in recent years, public perception of coal has worsened considerably. Environmentalists and climate change campaigners detest the fuel for its voluminous carbon emissions that contribute to global warming, while the natural gas industry wants to replace it with cleaner-burning gas.

Facing strong competition from gas and major regulatory headwinds, coal prices have plunged, and a number of producers have gone out of business or are on the verge of bankruptcy. But Ivan Glasenberg, the billionaire chief executive of commodity and mining giant Glencore, still believes in the universally loathed fuel. And he's putting his money where his mouth is.

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Glencore's contrarian bet

Glencore plans to invest more in thermal coal over the next few years than all three of its biggest competitors combined, in a contrarian bet that coal prices will rebound after suffering one of the worst declines in recent memory. The firm plans to spend $4.75 billion to boost coal output by 21% through 2016.

Glasenberg's bet comes amid a deteriorating outlook for the future of coal, which has been targeted for its disproportionate contribution to greenhouse gas emissions linked to global warming. New proposals by the Obama administration aimed to curb climate change could accelerate the retirement of more than a fifth of U.S. coal capacity by 2020. Other advanced economies are expected to follow suit.

Why, then, is the head of one of the most prominent and revered commodities giants betting on coal? It's probably because Glasenberg, who was born and raised in South Africa, knows a thing or two about coal that others don't. After joining Glencore in 1985, he worked in its coal department in South Africa for three years and in Australia for two years.

From 1988 to 1990, he managed the firm's coal marketing business in Asia and was then made responsible for its worldwide coal business in January 1990, a role he kept until he was appointed CEO in 2002. This extensive background in the coal trade has helped shape his and Glencore's positive medium-term outlook on the fuel, which contrasts so sharply with the rest of the industry.

Even as others are overwhelmingly bearish on coal's prospects, Glencore expects demand for coal exports to rise 12% by 2016, underpinned by growth in China, India, Vietnam, and Turkey, and expects some 1,600 new coal plants to be erected in 59 countries by 2020. On the supply side, the firm expects currently weak prices to force less profitable operations to shut down, thereby removing the supply overhang and supporting prices in the medium term.

Why the bet could pay off

While coal's longer-term outlook is admittedly cloudy, the fuel's medium-term prospects could turn out to be a lot better than most expect. In fact, coal may actually surpass crude oil as the single biggest global fuel source by 2020, according to projections by consultancy Wood Mackenzie.

By the end of this decade, global consumption of coal will rise by 25% to 4,500 million tonnes of oil equivalent, as compared to 4,400 million tonnes for oil, WoodMac said at the World Energy Congress in October of last year. This expected growth in global coal demand will be led overwhelmingly by China, which will account for two-thirds of the growth this decade.

Despite China's push toward cleaner-burning natural gas, it remains the world's largest coal consumer and will remain heavily reliant on the fuel for the foreseeable future. Roughly half of the nation's new power generation capacity to be built over the remainder of this decade will be powered by coal, Woodmac added.

The bottom line

Despite all the challenges it faces, coal will continue to play a leading role in our foreseeable energy future. Glencore, with its extensive expertise in all aspects of the coal business, knows that better than anyone. With current sentiment regarding the fuel overwhelmingly -- and perhaps unduly -- bearish, Glasenberg's big bet could pay off handsomely.

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