Coal blows an ill wind
Should Rio Tinto exit coal mining or take a stand as a coal champion?
Rio Tinto is a global diversified mining company that produces many of the metals and minerals essential to the world economy. Among these is thermal coal, an energy source that generates 28% of electricity globally[1]. Most of Rio Tinto’s thermal coal is sold in Asia, a region where energy demand is growing rapidly. However increasing concern about climate change is calling into question the future of coal as an energy source. Some commentators are even saying that coal mines will eventually become “stranded assets” as regulations make them uneconomic to run.[2] Should Rio Tinto exit coal mining altogether?
Rio Tinto is no stranger to the effects of global warming. In both 2011[3] and 2012[4] Queensland, Australia’s largest coal-producing state, was hit by heavy rains and severe flooding. Numerous open-pit coal mines had to be shut and a number of coal miners invoked force majeure in their supply contracts. The incidence of extreme weather events is likely to increase with global warming and lead to increased operational disruptions.
Regulatory efforts to limit the impact of climate change have created significant uncertainty about future demand for coal. The consensus view is that energy demand globally will continue to rise, but opinions vary widely about what share of that demand will be met by coal. IEA expects coal’s share of the energy mix to represent 30% by 2040[5], whereas BP expects coal’s share to fall to less than 25% as soon as 2035[6]. There is a risk that power generation will transition away from coal-fired power plants to alternative technologies. The result would be a slow and terminal decline in demand for coal, which would also put significant pressure on coal prices and the profitability of Rio Tinto’s operations.
Some competitors have already stopping investing in coal. BHP Billiton, Rio Tinto’s main rival, said in 2012 that it would limit investments in its coal division. If Rio Tinto believes there is a future for coal, it should use this opportunity to pick up assets being disposed by its competitors. Yet for a public company with a broad shareholder base, the optics of this route are untenable. Important investors like Norway’s government sovereign wealth fund and Calpers have said they are divesting from coal[7]. Rio Tinto is not immune to the prevailing winds, and increasing its exposure to coal may be widely criticised by its shareholders and the press. In response to an overall downturn in the coal market, Rio Tinto announced $0.8 billion of coal divestments in 2015 and 2016.
However these divestment efforts do nothing to address the question of energy poverty in emerging markets. 1.6 billion people in developing countries live without electricity in their homes, and Southeast Asia is one of the most energy-deprived regions in the world.[8] In the absence of credible and low-cost alternative technologies, coal has a role to play in the world’s energy mix. Rio Tinto has acknowledged as much in its annual report: “coal is a cost-effective and abundant energy source that will continue to be part of the global energy solution for years to come.”
Propagation of clean coal technology and an increase in power plant efficiency can significantly reduce the emissions created by the burning of coal.[9] Rio Tinto has to date spent over A$100 million on R&D in carbon capture and storage technologies.
At this time Rio Tinto remains invested in coal very much as a passive shareholder. Rio Tinto could arguably do much more to advocate coal remaining a part of the global energy mix. Major oil and gas companies have banded together and joined the debate to identify how they can play a part in limiting the effects of climate change[10]. Why shouldn’t Rio Tinto do the same for coal?
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[1] International Energy Agency, 9 August 2016, IEA data shows global energy production and consumption continue to rise
[2] University of Oxford, Smith School of Enterprise, 2015, Stranded Assets and Subcritical Coal
[3] Reuters, 11 January 2011, Q+A: Australia’s coal industry hit by Queensland flooding
[4] Reuters, 3 February 2012, Coal mines shut as Australia evacuates flooded towns
[5] BP Energy Outlook to 2035, 2016 edition
[6] International Energy Agency World Energy Outlook, 2015 edition
[7] Financial Times, 22 September 2015, Funds worth $2.6tn pledge to dump coal
[8] Birol, Fatih. 2007. Energy Economics: A Place for Energy Poverty in the Agenda? The Energy Journal
[9] Franco, A; Diaz, A. 2009. Elsevier. The future challenges for “clean coal technologies”: joining efficiency increase and pollutant emission control.
[10] Bloomberg, 20 May 2015. Oil Giants Band Together to Add Voice to Climate Debate
Sander, I find this a very interesting and well-reasoned perspective that illuminates a key point which is often missed in the climate debate. As you point out, investors concerned with optics- especially extremely wealthy, high visibility ones like Norway and Calpers- are extremely loud voices in the argument that coal is essentially evil and should be replaced or divested from immediately. While the climate change impact of burning coal is indisputable, there is a clear and very direct relationship between energy usage per capita and measures of economic development and quality of life such as HDI (the human development index) [1]. While the relationship trails off at very high energy usage quantities (due in large part to the US skewing the graph), there is a very strong correlation between energy usage and HDI at lower development levels [1] . The IEA has pointed out that the UN’s goals for reduction of poverty cannot be met without additional provision of power to developing areas of the world [1], where the more expensive and advanced energy solutions may not always be realistic.
For these reasons, I think a more useful approach to take would be to focus on phasing out coal usage in more developed areas of the world, while continuing to use it to help electrify poor populations in developing countries. In the long run, coal could be phased out in these areas also, but I think a blanket approach to immediately banning coal everywhere would have significant adverse effects on these poor populations. In the short-to-medium term, as you suggest, companies like Rio Tinto can invest in cleaner coal technologies, such as carbon capture [2] or coal gasification [3] so that in those developing areas of the world Rio Tinto can provide cleaner and less-polluting coal power solutions without completely removing coal from the mix.
[1] “World Energy Outlook 2004”. Chapter 10. International Energy Agency. Retrieved 5 November 2016.
[2] “What is CCS?” Carbon Capture & Storage Association. Retrieved 5 November 2016.
[3] Anderson, Richard. “Coal Gasification: The Clean Energy of the Future?” BBC. 14 April 2014. Retrieved 5 November 2016.
Thanks for this thought-provoking read, Sander! Queensland is my home state and my biggest consulting client in Australia was, in fact, Rio Tinto. What struck me during that time was the significant emphasis they placed on trying to operate in an environmentally sustainable way, with huge amounts resources dedicated to ensuring the “sustainable stewardship of the environment”. In fact, I remember a time where I was at Rio Tinto’s Clermont mine where they shut down all operations for three days (forgoing ~40K BCM of overburden removal a day) because a koala was lost in the mining pit…
For this reason, I would argue that while it makes sense to limit coal consumption in developed areas, there is still a role for developed countries in mining and producing coal – operations in Australia will undoubtedly be more environmentally friendly, with long-term reclamation plans, compared to those in China. Furthermore, Rio Tinto is also a world leader in autonomous mining (less so for their coal, more for their iron ore operations) – this can also help to lessen the human impact that mining in a region does.
This is a really interesting topic, thank you for posting!
Coal mines in the US have been declining in recent years and coal-fired power plants have similarly declined due to cheap natural gas from shale extraction flooding the market.[1][2] Given that coal is one of the most carbon intensive fuels I am inclined to think this is welcomed news.[3] When we add in your point about divestment, do we think that markets and the private sector will act in combination to kill coal? While I share your concern about stifling the growth of Asian nations by depriving them of cheap power, I think cleaner new technologies can match coal on price and should fuel the future of developing nations.
[1] https://www.sciencedaily.com/releases/2016/10/161007105548.htm
[2] http://oilprice.com/Energy/Energy-General/Cheap-Natural-Gas-To-Spark-Another-Wave-Of-Coal-Plant-Retirements.html
[3] https://www.eia.gov/tools/faqs/faq.cfm?id=73&t=11