The financial bonanza has been blessedly free of the scrutiny that ESG-focused investors such as BlackRock Inc. and Norges Bank Investment Management have devoted to thermal coal in recent months.
That’s rather remarkable. For all the attention on thermal coal, producing a metric ton of steel in a blast furnace releases almost as much carbon as burning a ton of coal for energy. Globally, the steel industry accounts for about 2.8 billion metric tons of annual emissions, compared to 10.1 billion tons for thermal coal. The world’s major iron ore producers are responsible for some of the largest volumes of end-use emissions globally, equivalent to those of the very biggest independent oil companies.
While Fortescue doesn’t disclose such Scope 3 emissions (unusual for a company that values its reputation for responsible business practices), a back-of-the-envelope calculation suggests it accounts for around 250 million tons of carbon pollution each year. That puts the company somewhere between Rosneft Oil Co. and Glencore Plc. The 35% stake held by Forrest and Minderoo equates to annual emissions similar to those from the entire country of Bangladesh.
How have steelmakers and iron miners evaded the attention of climate-focused investors? A large part of the explanation may be the perception that there’s no alternative to carbon-intensive blast furnaces to provide the world’s steel needs, rendering measures to reduce this emissions burden futile.
That’s increasingly not the case, though. Electric arc furnaces making recycled metal from scrap have swept through the U.S. steel industry in recent decades to push dirtier blast furnaces aside. The same technology can be adapted to make non-recycled steel, too, and using hydrogen to burn off the oxygen from iron ore can potentially almost entirely decarbonize the steelmaking process.
Swedish steelmaker SSAB AB this month announced plans with miner LKAB AB and utility Vattenfall AB to develop just such a fossil-free steel plant. While the product would cost 20% to 30% more than traditional blast furnace steel, it would be competitive at a carbon price of 40 euros ($43) to 60 euros a metric ton, according to a 2018 study — not that much more than current prices of around 25 euros in Europe’s carbon market. That would look still more attractive if falling prices for renewable electricity and hydrogen, plus wider deployment of electric furnaces, further drove down costs.
Forrest is in a unique situation to push miners, steelmakers and governments to accelerate this transition. Unlike the boards and management of BHP Group, Rio Tinto Group and Vale SA, he’s the founder and chairman of his company and has a dominant shareholding.
Forrest has made similar stands in the past. When he found at least 12 suppliers employing forced labor — an obvious conflict with his campaign against modern slavery — he promised to drum them out of business if they didn’t change.
To date, that same principled approach hasn’t extended to the role that Fortescue and its customers play in climate change. Despite donating A$70 million to aid recovery from the bushfires which have swept Australia in recent months, he’s vacillated between citing the role of global warming in the disaster, repeating bogus claims that arson played the “biggest part” in the fires, and making questionable arguments around reducing forest litter.
Pressed repeatedly in an interview with CNN last month to clarify what more he could be doing, he denied, implausibly, that the mining industry had “lobbied hard” against climate policies and said that “the science has to be done” on how to mitigate the fires. In a subsequent article for the Sydney Morning Herald, Forrest said that climate change is real and is intensifying natural disasters.
Fortescue is unusually well-placed to benefit from any shift in the steelmaking industry toward a lower-carbon route. The big loser from a move away from blast furnaces would be coking coal — but unlike BHP and Vale, Fortescue doesn’t produce any. Its iron ore is of lower quality than its larger competitors, so would have most to gain from being upgraded to the iron briquettes that would be consumed by electric primary steel mills. Forrest has invested A$20 million to develop hydrogen export capacity for Australia. Using that gas for upgrading ore would represent a much better use of the technology.
The risk for iron ore miners like Fortescue is that they’re betting everything on the odds that blast furnaces continue to dominate global steel production. With demand approaching a plateau, a glut of Chinese scrap looming, and rising attention on industrial carbon emissions, that’s no longer such a sure thing. A decade ago, miners were similarly full of confidence that wind and solar power could never supplant the role of thermal coal in electricity generation. How did that prediction turn out?
(Corrects the second paragraph of column first published Feb. 19 to show that Minderoo Group Pty. is the entity that receives dividends; clarifies Forrest’s position on climate change in the 12th paragraph.)
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David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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