Fortescue’s Forrest needs to put the ESG into iron ore
Producing a tonne of steel in a blast furnace releases almost as much carbon as burning a tonne of coal for energy
Australia’s richest man Andrew Forrest cherishes his reputation as one of the good guys. That makes his intimate involvement in one of the world’s most polluting industries a problem.
The founder of the world’s fourth-biggest iron-ore miner Fortescue Metals Group has done spectacularly well from riding the Chinese steel boom of the past two decades. Net income at Fortescue increased nearly fourfold to $2.45bn in the first half of the year, the company said on Wednesday, delivering A$828m ($554m) of interim dividends to Forrest and the Minderoo Foundation he controls.
The financial bonanza has been blessedly free of the scrutiny that environmental, social and governance (ESG)-focused investors, such as BlackRock 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 tonne of steel in a blast furnace releases almost as much carbon as burning a tonne of coal for energy. Globally, the steel industry accounts for about 2.8-billion tonnes of annual emissions, compared to 10.1-billion tonnes 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.
Fortescue doesn’t disclose such scope 3 emissions [all indirect emissions, not included in scope 2, that occur in the value chain of the reporting company, including both upstream and downstream emissions] — unusual for a company that values its reputation for responsible business practices; but a back-of-the-envelope calculation suggests it accounts for about 250-million tonnes of carbon pollution each year.
That puts the company somewhere between Rosneft and Glencore. 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 US 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 decarbonise the steelmaking process.
This month, Swedish steelmaker SSAB announced plans with miner LKAB and utility Vattenfall 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 to €60 a tonne, according to a 2018 study — not that much more than current prices of about €25 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.
He’s vacillated between citing the role of global warming in the disaster ... and making questionable arguments around reducing forest litter
Forrest is in a unique situation to push miners, steelmakers and governments to accelerate this transition. Unlike the boards and management of BHP, Rio Tinto and Vale, he’s the founder and chair 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 labour — 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$70m to aid recovery from the bushfires that 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 has “lobbied hard” against climate policies and concluded that “the science has to be done” — as if the science on climate change hasn’t been settled for a generation.
Fortescue is unusually well-placed to benefit from any shift in the steelmaking industry towards 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 the most to gain from being upgraded to the iron briquettes that would be consumed by electric primary steel mills.
Forrest has invested A$20m 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 such as 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?
• Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies.