IEEFA Japan: ITOCHU Corporation announces coal exit

February 15, 2019 (IEEFA Japan) – ITOCHU of Japan has announced it is exiting from developing new coal-fired power plants as well as thermal coal mines to address the impact of climate change, and will continue to divest its existing thermal coal mine investments in Australia and Indonesia.

IEEFA sees this as a major policy pivot for ITOCHU, a company with an equity market capitalisation of US$29 billion, clearly acknowledging the need for urgent action on climate change.

Tim Buckley, Director of Energy Finance Studies with the Institute for Energy Economics and Financial Analysis (IEEFA) says the company is redirecting its capital allocations to thermal coal mining and coal-fired power plants and proposing to instead prioritise investment in low-carbon industries of the future.

“Over the last two decades Itochu has been one of the top 10 investors in the Australian coal industry,” Buckley said.

“This change in policy direction builds on a number of policy developments by corporate and financial institutions announced in Japan since May 2018 including by Dai-ichi Life, Sumitomo Mitsui Trust Bank, Marubeni Corp, Mitsui & Co as well as Mitsubishi Corp.

“Collectively, IEEFA views these announcements as increasingly significant given Japanese financial institutions have been at the top of the list in terms of global financial institutions funding new coal-fired power plant developments globally.”

Japan’s export credit agencies have been the leading providers of state-subsidized capital underwriting coal-fired power plants in most of the major emerging markets like Pakistan, Bangladesh, Vietnam and Indonesia, as well as across Africa.

Japan’s globally significant trading houses have leveraged Japanese public and private financial capital to underwrite new projects, taking equity stakes and using this provision of debt and equity capital to win engineering, procurement and construction (EPC) contracts.

“This latest move by ITOCHU looks like an important endorsement of Japan moving away from coal financing,” Buckley said.

“What happens in Japan is critically important to the global coal industry. And for Australia, given 44% of all Australian thermal coal is exported to Japan alone.

“The string of Japanese coal exit announcements over the last 8 months suggests Japan is belatedly doing a pivot on climate change.

“The implications for markets such as Australia who rely on predominately thermal coal exports is very real. With New South Wales number one market being Japan, some 44% of the states’ total thermal coal export volumes, the inference is that global markets expecting to export thermal coal to Japan need to review their business models.

“The momentum away from financing coal is building.”

Media Contact: Kate Finlayson ([email protected]) +61 418 254 237

Author Contact: Tim Buckley, Director of Energy Finance Studies, IEEFA Asia Pacific [email protected] Phone +61 40 8102127

Background Briefing

Details on ITOCHU

Back in May 2018, ITOCHU acknowledged as a key risk the need to address climate change and the need to promote business activities aimed at contributing to the realization of a low-carbon society.

The company’s announcement yesterday commits ITOCHU “to neither develop any new coal-fired power generation business nor to acquire any new thermal coal mining interest.”[i]

As part of this new policy, ITOCHU has announced it has sold its 12.5% interest in the 13Mtpa Rolleston thermal coal mine in Queensland, having divested its 35% interest in the Glencore-run NCA Project (which is the Newlands and Collinsville mines plus Abbot Point coal port access in central Queensland) in September 2016.

Regarding ITOCHU’s existing thermal coal mining business, ITOCHU states it will “review it and contribute to the development of a sustainable society while responding to the social demands of stable supply of energy to domestic and overseas customers.”

Having commenced investments in Australian coal mining 25 years ago, ITOCHU has been one of the largest investors in the Australian coal mining sector, and even after these divestments, its retains minority equity stakes in several major coal mine developments across Australia including a 15% stake in the Whitehaven-run 10Mtpa Maules Creek thermal coal mine, a 12.5% stake in Glencore’s huge but long deferred Wandoan proposal in the Surat Basin (3bn tonnes of undeveloped thermal coal resources) and a 20% stake in an undeveloped coking/thermal coal proposal in Indonesia).

ITOCHU was one of the lead developers in the 2,000 MW Batang coal-fired power plant in central Java that was the subject of huge local and international resistance and that was delayed for several years as a result.

Building Momentum in Japanese Coal Divestment Announcements

In May 2018 Japan witnessed its first financial institution’s thermal coal exclusion move, with Dai-ichi Life Insurance Company’s announcement restricting finance to coal power plants.

By the end of 2018 three of Japan’s largest life insurance companies, Nippon Life, Dai-ichi Life and Meiji Yasuda Life each announced they would no longer fund new coal projects.

In July 2018 Sumitomo Mitsui Trust Bank (assets of US$483bn) become Japan’s first bank to put in place a policy precluding project finance for new coal-fired power plants, with no geographic exclusions.

In September 2018 Prime Minister Shinzo Abe penned an opinion piece in the Financial Times titled “Join Japan and act now to save our planet”. Unprecedented extreme weather events continue to rock Japan’s economy, killing more than 200 in the same month as extreme heatwaves killed 160 Japanese citizens. Citing the United Nations Intergovernmental Panel on Climate Chante (IPCC) report, Prime Minister Abe called for urgent global action and a reduced reliance on fossil fuels.

Also in September 2018 Marubeni Corp announced an immediate exit from any new coal power plant development globally. Marubeni said this decision did not immediately affect their existing 13GW global coal-fired power portfolio already under development, but IEEFA notes several of these developments have already been deprioritized or lost momentum. Marubeni also stated an intent to double the firm’s global investment in renewables. Acknowledging the collapsing cost of renewables, in December 2018 Marubeni’s Masumi Kakinoki, Chief Executive Officer (CEO) of the company’s electricity generation business committed to add 1 GW of clean energy over the next five years as it halves its coal-fired generation by 2030.

In October 2018 Mitsui & Co CEO Tatsuo Yasunaga announced: “We’ve made it clear that we won’t invest in new thermal coal mining projects.” A month later Mitsui sold its last remaining dedicated thermal coal mine, a 10% stake in Bengalla to New Hope Corp.

And in December 2018 Mitsubishi Corp announced it was selling its two remaining thermal coal mines in Australia, a 10% stake in Ulan was sold to Glencore, while a 31% stake in Clermont was sold to a joint venture of Glencore and Sumitomo Corp.

[i] Itochu Corporation policy statement: “Coal-related business policy”, 14 February 2019.