This will affect companies such as Rio’s fellow mining giant BHP, Bluescope Steel, coalminers Whitehaven, New Hope Group and Yancoal, and cement makers Adelaide Brighton and Boral. Last weekSwiss mining giant Glencore said it wouldn’t expand its Australian thermal coal productionany more, under pressure from investors in the Climate+100 group.
Mainstay of prosperity
Iron ore and coal are the mainstays of Australia’s commodity exports, withtotal coal sales overseas expected to hit $67 billion this year, just pipping iron sales of $64 billion, according to the Department of Industry’s Resources and Energy Quarterly.
These industries are riding high on buoyant international prices and demand, andRio has rewarded shareholders with a $US4 billion ($5.6 billion) special dividendafter reporting a net profit of $US8.8 billion for the year to December 31 and an exciting new copper deposit in Western Australia.
Copper producers will be one of the key beneficiaries of a global shift to electric passenger vehicles and light trucks, making the find especially timely. But Rio makes no bones about the threat to iron ore from climate change policies, and by extension steel – which poses a threat to Bluescope Steel and Sanjeev Gupta’s Liberty OneSteel.
It notes that steel making is highly carbon intensive, and “the transition to low emissions could impact the competitiveness of our iron ore product”.
In the short to medium term, which Rio defines as from now to 20 years, Pilbara iron ore becomes less attractive due to the increased use of scrap iron and steel but remains profitable amid robust demand for lump and pellet iron ore and there is scope to sharply reduce the carbon footprint of the mining operations.
Bright side: Electrification
On the bright side, electrification of transport will increase demand for copper and other battery materials such as lithium and prices for these commmodities will remain high for extended periods because supply will lag demand due to long mine development lead times.
Emission-reduction policies will increase aluminium prices, benefiting low carbon producers such as Rio’s Bell Bay smelter in Tasmania but putting pressure on high carbon aluminium producers such as the company’s Tomago, NSW, and Boyne Island, Queensland, smelters. Overall Rio’s Australian aluminium production is three times as carbon intensive as its Canadian production.
In the long term – 20 to 50 years – “there is large uncertainty over how the steel sector will decarbonise” Rio says, “which could materially affect the value of Rio Tinto’s iron ore business“.
As well, there is the risk of more frequent and intense cyclones in the Pilbara hitting production. These risks could be offset by increased demand due to faster electric vehicle take up and investment in the power grid, offset by increased use of scrap, and the development of lower carbon aluminium smelting technologies.