Tuesday, 1 February 2011

King coal will be dethroned, and BHP should align itself with the carbon revolt

Sydney Morning Herald
27 January 2011, Page: 6

This decade will mark the beginning of the end of the fossil fuel era, writes Matthew Wright.

Countries that are taking rapid action on climate change are reshaping the global commodities market. Coal is now among Australia's largest exports but demand for the commodity will drop as the global economy shifts to renewable energy. This represents a risk and an opportunity for Australia and its miners.

The largest importers of Australian coal, Japan, Korea, and China, have ambitious plans to decarbonise their economies. Japan, our single biggest importer of coal, has a 25% emission reduction target by 2020. South Korea is investing about $85 billion over five years (2% of GDP per year) in renewable energy and other clean technologies in its "green new deal". And China, while increasing its consumption of Australian coal over the last few years, aims to source 15% of its energy from nonfossil fuel sources by 2020. For Australia, this would be the equivalent of a 70% renewable energy target.

These powerful Asian economies will decarbonise through the mass deployment of renewable energy, electric vehicles and other clean technologies. These combined efforts mean that demand for Australian coal will decline dramatically in the decades ahead. Companies such as BHP Billiton must get out of the coal supply chain sooner rather than later. As the impacts of climate change worsen and the calls to hold fossil fuel companies accountable grow louder, coalmining is shaping up as the asbestos liability of the 21st century. BHP Billiton's $11 million donation to the Queensland flood appeal shows that it is feeling exposed after public calls for coalminers to pay for the flood damage.

BHP Billiton needs to reassess its investments in steaming coal (less than 4% of annual profits). The company can instead service demand for 21st century commodities by taking a leadership position as the world moves towards renewable energy sources. It can replace its income stream from coal with increasingly valuable rare earth minerals. It has an additional opportunity to bolster its alumina, iron ore and other important mineral operations that are needed in the renewable energy industrial revolution now taking place in Europe, China and the US.

China controls almost 95% of rare earth supplies. It is trying to maintain this control by imposing export quotas that limit the supply of rare earths to the global market. This underscores the fantastic opportunities that exist for firms that break China's grip on supplies, not to mention the positive security outcomes of such a move. As Australia's biggest company and the world's third largest, BHP Billiton should be pursuing this security agenda that aligns so well with its future profitability.

BHP Billiton's attempt to purchase Canada's Potash Corp was on the right track. Potash is involved in rare earth mining operations, extracting minerals needed for solar panels, wind turbines, electric vehicles, and consumer electronics such as tablet computers and smart phones. Potash Corp is also a supplier of potassium and sodium nitrate, the core ingredients of the molten salt energy storage used in the now booming solar thermal power industry in the US and Spain.

Coking coal is a bigger issue for BHP Billiton. Comprising about 10% of its profits, the company is at risk because of the steel sector's move away from blast furnaces that need coking coal. Emerging best practice for steel-making uses direct reduced iron (DRI) production methods that require either natural gas, low-grade steaming coal or can be migrated to Syngas" target="_blank">syngas produced from biomass or hydrogen. Half of the new steelmaking facilities in India use DRI. If shareholders knew this they would demand action before their stock loses value.

Industrialisation over the last 200 years has provided Australia and the world well, but our mistakes are catching up with us. Miners such as BHP Billiton can move from being part of the problem to part of the solution by implementing mining best practice and funding research to improve it further. The opportunities are for a sophisticated, wired economy based on wind and solar power and computers and electronics improving human connectedness and well-being. By choosing an unpopular and dangerous polluting route, BHP Billiton is not only letting its shareholders down but people the world over.

This decade marks the start of the winding down of the fossil fuel industry. The shift is being driven by efforts to address climate change, energy security and build clean energy economies. In 2011 we look forward to seeing the beginning of the shift of Australia's major mining companies to reorient their operations to deal with the challenges of decarbonising the world economy.

Matthew Wright is executive director of Beyond Zero Emissions