Pivot from coal affecting Japanese trading companies

  • Energy

Pivot from coal affecting Japanese trading companies

Japan’s trading houses are accelerating the withdrawal from or retrenchment of their coal-related businesses, as concerns are growing over coal’s global warming impact.

Itochu Corp. has begun considering a policy of not acquiring any new interests in coal mines, where coal as fuel for thermal power plants can be produced.

This is because financial institutions and investors have been increasing their efforts to consider environmental, social and governance (ESG) indices in their investment processes, choosing to invest in companies that take environmental factors into account.

Yet, as Japan’s dependence on coal is high, particularly at thermal power plants, the issue of how to secure a stable supply of coal poses a challenge.

Coal is roughly divided into two types: fuel coal and coke, the latter being a raw material used in steelmaking. Trading companies obtain coal by acquiring interests in coal mines or importing coal procured through leading mining companies. They are also engaged in the coal-fired power generation business.

 

Itochu will continue the development of coal mines that the company has under way in Colombia and Australia, but it will freeze any new investment in similar development. In fiscal 2017, Itochu sold a combined total of about 11.5 million tons of fuel coal and coke to power companies, leading steelmakers and others in Japan and abroad, but does not intend to pursue any expansion in the scale of this business.

Mitsui & Co. and Mitsubishi Corp. announced in December last year that they will sell off their interests in mines of fuel coal that they separately own in Australia. When their sell-offs are completed, both firms will have virtually no interests left in fuel-coal mines. Marubeni Corp. globally operates coal-fired power plants with an estimated total output of 3,000 megawatts, equivalent to three nuclear reactors, but will halve such operations by 2030.

Lying behind such trends is a spread of the thinking that considers ESG indices in investment. Sumitomo Mitsui Trust Bank and Nippon Life Insurance Co. have a policy of not financing, in principle, any new projects related to coal-fired power generation.

The Norwegian government’s pension fund has decided to withdraw its investments from companies involved in coal-related businesses, including Japan’s leading power companies.

ESG investments worldwide are on the scale of as much as ¥2,500 trillion, accounting for one-fourth of global investment funds, according to some estimates. This is a scale the trading houses, which procure funds and then inject them into investments, cannot ignore, leading them to review their coal-related businesses.

Steady supply vital

In Japan, coal-fired power generation accounts for about 30 percent of total power output, with demand for coal still strong, mainly from power plants.

In order to fulfill their responsibility to supply coal to power plants, trading houses intend to continue their imports of coal by procuring them from mining companies, even if they relinquish their own direct interests in coal mines.

But such resource-procuring businesses, including coal and petroleum, are vulnerable to impacts from international situations. It is because there is a possibility of the procurement becoming difficult due to deteriorated relations with resource-producing countries or an outbreak of conflict. Given such scenarios, there are also those who have misgivings about relinquishing interests in coal mines.

The coal mine interests in Australia that Mitsubishi will sell off are expected to be acquired by Sumitomo Corp. Some see this as a move to prevent Chinese companies from acquiring them. Masayuki Hyodo, president of Sumitomo, said, “The matter is not one that would be considered taken care of by just quitting the coal businesses, but one that needs to be considered comprehensively.”Speech

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Publication Date
Tue, 01/29/2019 - 19:44