For investment managers who put a lot of store by their assumed environmental responsibilities, Britain’s FTSE 100 index of leading shares looks ever more like a no-go zone. Few other indices are as top heavy with leading oil and mining finance stocks as Britain’s unloved FTSE, with six of the world’s biggest.
Small wonder that Shell has caved into pressure to pull out of the Cambo oil development off Shetland, effectively signing the field’s death warrant; self harm of this sort is about the only way you can get the blighters to invest in you these days.
Political correctness has seemingly triumphed over the bottom line, though in lip service to the latter, Shell unconvincingly claims that the economic case for investing in the development is no longer strong enough. Why it was still thought viable a year ago when the oil price was languishing at $50 a barrel, but not now when it is at $75, is not explained.
Yet it is not the oil majors I chiefly want to write about today. Rather, it is those other stock market pariahs, the big mining finance houses. Like performing monkeys, they too are increasingly forced to jump through the Environment, Social and Governance (ESG) hoops in order to gain continued access to capital.
If meeting these requirements sounds like a contradiction in terms for such companies, that’s because it largely is. Mining has a terrible history; it routinely inflicts significant environmental damage, and is frequently pursued with scant regard for safety and workers’ rights. It is also highly energy intensive, and therefore makes a considerable contribution to global warming. It’s hard to impossible for these corporate goliaths to tick ESG boxes.
Big strides have been made in recent decades in cleaning up the industry’s act, but the disasters keep coming. Vale, the Brazilian mining giant, has presided over two tailings dam failures over the past six years, with another now reportedly imminent. The destruction of two ancient and sacred rock shelters in the Pilbara region of Western Australia by Rio Tinto as part of an iron ore mine expansion was equally jaw dropping in its seemingly casual disregard for modern standards of corporate responsibility. Try as it might, this is not an industry that will ever achieve the holier than thou status of Tesla or Ørsted, the world’s largest electric car and offshore wind companies respectively.
But here’s the irony; we’ll need the FTSE four of Glencore, BHP, Anglo American and Rio Tinto more than ever if the energy transition required to meet net zero targets is ever to be achieved. And so will Tesla, Ørsted and other supposed clean energy companies. The campaigners who scream “do something” at every available opportunity seem entirely unreconciled, even oblivious, to the fact that the desired progress requires a massive increase in the world’s production of key metals.
Pariahs they may be, but the FTSE’s mining four are going to be in the thick of this surge in demand. If we think of the metals most needed to power the energy transition – copper, nickel, cobalt and lithium – then each of these companies is a top five producer in one or more of them. Nor is it just these metals. Wind turbines use huge amounts of steel, which in turn requires iron ore and coking coal. Alternative, green steel is still a long way off.
According to recent research by the International Monetary Fund, the total value of metals production will need to rise more than four-fold for the period 2021 to 2040, rivaling the total value of current crude oil production, in order to achieve the net zero by 2050 goal. This will in turn cause metal prices to surge to unprecedented levels.
Looking at the long term history of commodity prices, we see a huge real terms reduction even as global demand soared. That’s both because of the discovery of bountiful new sources of supply and because of dramatic improvements in extraction technologies and transport. But that long term pattern is interrupted by so-called supercycles that coincide with sustained periods of industrialisation and infrastructure spending.