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FTSE 100 miner Glencore's $1.7bn punt on coal

Received wisdom has it that the days of King Coal are over.

Demand for the fuel that powered the Industrial Revolution flat-lined last year, in contrast with demand for oil, gas and renewables. Western nations are anxious about the fuel's role in causing pollution and climate change.

In France, President Macron has promised to close all coal-fired power plants by 2021, with Britain and Italy due to follow four years later.

Canada has largely stopped generating power from coal and even in America, despite President Trump's support for the industry, demand peaked 11 years ago - with coal overtaken by gas two years ago as the main source of power.

Of the major western economies, only Germany still depends more on coal than on any other energy source.

The 2018 edition of BP's influential Global Energy Outlook, published last month, forecast that coal demand from the rich OECD countries will fall away sharply in coming years. It predicted that, by the middle of the century, 65% of all global demand for coal is expected to come from China and India alone.

Accordingly, many of the world's big mining companies are turning their backs on coal.

Rio Tinto (Hanover: CRA1.HA - news) , the world's second-largest miner, is selling its coal assets. Anglo American (LSE: AAL.L - news) , another top ten producer, sold the last of its South African thermal coal assets earlier this month, although it still has coking coal assets in Australia, South Africa and Colombia.

BHP Billiton (NYSE: BBL - news) , the world's biggest miner, still owns large coal assets in Colombia and Australia but is clearly thinking hard about coal. Just before Christmas it said it would leave the World Coal Association, the main industry body, this year due to disagreements over climate change.

But one very significant voice in global mining begs to differ: Ivan Glasenberg, chief executive of Glencore (Frankfurt: 8GC.F - news) , the world's third-largest miner.

On Tuesday, he paid Rio $1.7bn (£1.2bn) for Hail Creek, an open cast mine in Queensland that has been operating for the last 15 years and for Valeria, also in Queensland.

Rio has now sold all of its thermal coal assets and its remaining coking coal assets (thermal coal is used for energy, coking coal is used largely in steel production) are also up for sale.

So Glencore is very much swimming against the tide. Why? Mr Glasenberg believes demand for thermal coal will remain robust and that, crucially, that it may not be met by extra supply.

He told investors last month: "I know it's not a loved commodity, but it is powering the Asian growth and urbanisation which is occurring in the emerging markets. Demand continues to grow in emerging markets and…there is under-investment in supply. You don't see new coal mines being built around the world."

And, where they are, he added, it is largely in Indonesia, where the coal produced generates less energy when burned than coal from elsewhere.

So, while the amount of coal being produced for heating is still rising, the amount of energy capable of being generated by the coal being produced globally is actually falling.

Around one-third of Glencore's earnings last year came from coal and it is still seen as a buyer of quality assets.

A lot of the Australian assets Glencore has been buying are not only good quality but also have a ready customer in Japan which, having decided to turn its back on nuclear power following the disaster at the Fukushima plant in 2011, is building more coal-fired power stations.

Specifically, Japan is interested in developing 'clean coal' technology that delivers power with lower CO2 emissions than traditional coal-fired plants, even though the technology is still open to question and may be rendered less economic as renewables prices continue to fall.

Understandably, Japan is nervous about the growing concentration of the Australian coal market in Glencore's hands, something the latter insists is not significant in the context of a global thermal coal industry that produces six billion tonnes annually.

The world of coal has long been full of contradictions.

The Left in Britain still romanticises the pit strike of 1984-85 - even though Harold Wilson closed twice as many coal mines as Margaret Thatcher.

Japan is opening coal mines - even though it was in a Japanese city, Kyoto, where the world first signed up pledges committing to reduce greenhouse gas emissions.

Germany is regarded as a global leader in fighting climate change, despite burning more coal - and dirtier coal - than most other developed nations.

On that basis, Mr Glasenberg's bet on coal, while looking contrarian, may prove to be wholly rational.