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Marubeni’s coal problem: A Japanese multinational’s power business is at risk

July 01, 2018
Tim Buckley and Simon Nicholas
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Key Findings

Driven by ever-growing global carbon and pollution concerns, Japan is facing increasing pressure against both its domestic reliance on coal-fired power and its strategy of pushing its subsidised coal-fired power technology onto developing countries.

As Japanese financial institutions have started to turn away from coal, Marubeni's coal-fired power plant construction program is becoming increasingly controversial, particularly in “frontier” countries.

While Marubeni has not entirely ignored the rise of renewable energy, its seems largely agnostic as it continues to focus much of its power-generation attention on its coal-fired power build-out, particularly in developing countries that will not benefit in the long run from such investments.

Executive Summary

Marubeni’s coal-fired power business is significantly exposed to the rapid changes taking place in global energy markets.

It has become increasingly clear that renewable energy technology will dominate power capacity build-out over the rest of this century.

The company faces major reputational risk issues with current and potential investors as global demands for action on carbon emissions continue to grow from governments, investors and civil society. Examples of shareholder value losses driven by companies’ continued presence in the coal-fired power sector are becoming increasingly commonplace.

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Marubeni’s Recent Coal-Fired Power Projects

Senior members of the Japanese government are now emphasizing how the nation’s support for coal-fired power build-out domestically and overseas is failing to meet increasing global expectations for action on carbon emissions. Japanese banks and investors are seriously considering joining global financial institutions in turning away from the coal industry as it makes increasingly less financial sense to support it in the wake of the massive technological disruption caused by cheap renewable energy.

Marubeni’s Power Business & Plant Group was the single largest contributor to overall net profit for the year to 31 March 2018. The company is exposed to an overall reduction in profitability if the returns from this business unit decline.

As the global electricity generation transition gains pace, moving fossil fuel-based power businesses toward their inevitable end, tremendous opportunities will emerge for companies that can expand further into clean energy technology.

With innovation central to its management philosophy, Marubeni—to its credit—recognizes that major transitions require companies to be prepared to abandon old approaches that no longer make business sense going forward.

As the company state in its 2017 annual report:

“We will decisively divest assets that lack a clear strategic rationale and strategically exit businesses that are past their prime.”

This report finds that Marubeni has reached an energy crossroads; the company is deeply involved in coal-fired power and renewable energy projects both domestically and overseas, yet only the latter has a sustainable and growing future.

Among the factors that leave Marubeni’s coal-fired power business strategically exposed:

  • Increasing pressure on the Japanese government to end its support for coal-fired power. An energy taskforce set up to advise the Japanese foreign ministry stated in February 2018 that Japan’s current energy policies are damaging the nation’s global competitiveness. “For too long Japan has turned a blind eye to global trends, such as the dramatic decrease in the price of renewables and the inevitable shift to decarbonisation in the face of climate change,” Foreign Minister Tarō Kōno said in January of this year.
  • Growing criticism of Japanese export credit and development agencies for their support of coal-fired power. Agencies such as the Japan International Cooperation Agency (JICA) undoubtedly do important work funding infrastructure projects in developing countries. However, where this includes support for coal-fired power, such efforts are contrary to Japan’s climate-risk commitments and to common business sense.
  • Rising calls among global investors for action to significantly reduce carbon emissions. In the lead-up to the June 2018 G7 summit, a group of major international investors with a cumulative US$26 trillion of assets under management called for a phase-out of coal-fired power. The 288 investor signatories to the statement included Allianz Global Investors, HSBC Global Asset Management and Nomura Asset Management (a major Marubeni shareholder). The group also called for the end of subsidies for fossil fuels and a meaningful price on carbon. Amundi, Europe’s largest asset manager with US$1.6 trillion under management, has stated that global investment has reached a clear tipping point with regard to climate change. Major investors are increasingly taking such risks seriously in their decision-making.
  • The fact that global and Japanese banks alike are turning away from the coal industry. RBS announced in May 2018 that it will no longer provide project finance for new coal-fired power stations and coal mines. This follows recent moves by other European banks such as ING, Credit Agricole, Deutsche and BNP Paribas. Japan’s Sumitomo Mitsui Financial Group has indicated that it may rethink its stance towards coal. This move is almost certain to eventually be followed by other major Japanese coal financiers that include Mizuho Financial Group and Mitsubishi UFJ Financial Group, the largest bank lenders to Marubeni.
  • The fact that insurance for coal-fired power plants is becoming increasingly expensive and harder to come by. Japan’s second largest insurer, Dai-ichi Life Insurance, announced in May 2018 that it will no longer provide finance for overseas coal-fired power projects. This significant announcement was the first time a Japanese financial institution committed to restrict coal finance. Nippon Life Insurance, Japan’s largest insurer, announced in July that it will also stop financing coal-fired power both in Japan and overseas. These companies are amongst the top 10 lenders to the company as at 31 March 2018.
  • The trend among Japan’s trading houses toward recognizing the risks associated with coal. Mitsubishi Corp. has moved to sell its stake in Australian thermal coal mines. Mitsui and Co. has stated that it has no plans to invest in new thermal coal. Sojitz is planning to reduce its exposure to thermal coal. Marubeni itself no longer has any investments in operational thermal coal mines.
  • The significant inroads being made by renewable energy into all of the power markets where Marubeni is planning and building coal-fired power plants. In countries like Vietnam, Indonesia and Egypt where Marubeni is active in developing new coal-fired power, Japanese companies are also investing in renewables, Marubeni amongst them.
  • Mounting public opposition to Marubeni’s current coal-fired power projects across Asia and Africa. South Africa, Vietnam and Indonesia are examples of places where Marubeni faces committed opposition to its coal projects. Public opposition can often cause significant delays and increased costs to coal-fired power projects.

Marubeni’s own shareholders, too, will be increasingly concerned about the risk of continuing in the coal-fired power sector as the transition toward renewable energy continues globally. Power utilities such as Engie, RWE and E.On, which made their move away from coal late and as a result suffered sustained shareholder value destruction, have since reinforced their planned transition to renewables and heavily restructured their businesses. Companies in the coal-fired power equipment sector, such as GE, Siemens and Mitsubishi Heavy Industries, have suffered similar declines in shareholder value as orders dry up. These companies are now faced with the need to realign their businesses to better suit the energy markets of the future in order to avoid further shareholder value destruction.

To avoid this fate, Marubeni needs to cease further coal-fired power development.

Fortunately, the company is already operating in the renewables space globally and has gained experience that can enable its Power Business & Plant Group to flourish if the company fully commits to transition. Marubeni’s Chairman, Teruo Asada, has previously called for the Japanese government to encourage domestic renewable energy investment, and the company has clearly acknowledged the opportunities that transition can offer:

“We look upon recent major changes in our business environment as a tremendous chance for general trading companies to create new high-growth business opportunities. We in the Marubeni Group have the power to resolve such societal issues and create new business opportunities amid change” – Marubeni Integrated Report 2017.

Meanwhile, momentum around renewable energy has increased the attractiveness of the sector, as can be seen in several developments:

  • Japanese banks have turned towards renewable energy financing. Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group have been amongst the largest lead arrangers globally for clean energy asset financing in recent years. These two banks in particular have moved into offshore wind in Europe and are now moving into the growing Taiwan market. Japan’s domestic offshore wind market is increasingly ripe for development.
  • Japan’s Export Credit Agencies have started to finance renewable energy projects globally. The Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI) have supported Japanese technology in Egyptian wind power and Indonesian geothermal power projects. JICA has also funded Indonesian geothermal projects, a Mongolian wind farm, and a solar PV project in Jordan.
  • Substantial opportunities in renewable energy await Marubeni in markets where it has experience. The fast-developing offshore wind markets of Taiwan and Japan present opportunities for Marubeni to utilize its European experience. The Middle East, a market where Marubeni already has a high-profile presence in solar PV, has seen a dramatic take-off of solar energy activity. Marubeni’s geothermal experience may benefit the company if it takes part in a roll-out of geothermal technology across Indonesia and East Africa. And the electric vehicles (EV) sector, which Marubeni has already identified as a key growth area, is poised to grow significantly.

Japan is home already to a number of clean-energy champions that include Panasonic, SoftBank, and MHI Vestas. Other Japanese trading houses are increasingly active in renewable energy.

Marubeni’s renewables experience positions it to join this group and become recognised as a global clean energy leader. To succeed in this, it will need to abandon its strategically challenged coal-fired power development business.

Press release: IEEFA report: Marubeni’s coal commitments are creating ‘needless reputational and financial risk’

Please view full report PDF for references and sources.

Tim Buckley

Former Director Energy Finance Studies, Australasia, Tim Buckley has 25 years of financial markets experience, specializing in equity valuation, including as a top-rated analyst and as co-founder and managing director of Arkx Investment Management.

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Simon Nicholas

Simon Nicholas is IEEFA’s Lead Energy Finance Analyst for Bangladesh, Pakistan and the global steel sector as well as Asian seaborne thermal and coking coal markets.

Simon’s focus is on the energy transition, the long-term outlooks for coal and steel as well as the need for emerging nations to establish financially sustainable power systems to support their development.

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