ESG Focus: The Little Big Things – 23-11-2023

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
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ESG Focus: The Little Big Things – 22-11-2023

This edition, FNArena (net) zeroes in on green steel developments: the SBTi estimates -14% of steel producers’ value is at risk if the industry fails to innovate; much depends on the pace of the green-steel ramp-up; Macquarie evaluates BlueScope Steel's odds; Morgan Stanley checks out Rio Tinto’s green ambitions; and Australia’s miners help develop the Net Zero Standard for Diversified Mining.

-Fortescue Metals has approved green iron commercial trial
-About 14% of steel producers’ value “at risk”
-Much relies on the pace of the green-steel ramp-up
-Macquarie observes BlueScope Steel has much to gain
-Morgan Stanley reports back from Rio Tinto
-Aussie Miners contribute to Net Zero Standard for diversified mining

Compiled by Sarah Mills

Things are hotting up on the green-steel front in Australia following Fortescue Metals Group's ((FMG)) Final Investment Decision to proceed with its green-iron trial in Western Australia.

First production is slated for 2025 and, if successful, could result in a major rejig to Australia's iron-ore mining and steel production trajectory and investments – and the world's. 

The news follows a number of developments on the global front in recent months, which we summarise below.

About -14% Of Steel Producers’ Value “At Risk”

The Science Based Targets initiative (SBTi) published its first decarbonisation framework for iron and steelmakers in October, providing guidance on how quickly and by how much the steel value chain will need to cut emissions to meet a 1.5C target by 2050.

Steel directly constitutes about 7% of global emissions but indirect emissions increase this to 3.6Gt from 2.6Gt.

The initiative says direct emissions must fall by more than -91% by 2050 relative to a 2021 baseline.

The paper estimates -14% of the potential value of steel companies could be at risk from rising carbon prices by 2040 should the industry fail to innovate.

Steel Decarbonisation Dependent on Pace Of Ramp-up

Citi observes steel decarbonisation momentum has accelerated since the pandemic.

Citi notes the OECD estimates roughly two thirds of the global steel capacity was covered by net zero commitments at the end of 2022.

It also estimates there were more than 60 “innovative near-zero emission projects” under way at the end of 2022, compared with 20 in 2020. These include hydrogen-based DRI, carbon capture and sequestration and iron-ore electrolysis.

Its recent research titled European Steel – Decarbonisation Investments Are Affordable but re-rating the big upside for equity investors Citi has concluded such investments can only be undertaken if they are staggered, and only if the renewable energy investment is undertaken by others.

A separate piece of research observes investors are sceptical about the amount of green premiums that can be secured by the steel companies in terms of product pricing and multiples, and the availability of green energy to feed hydrogen electrolysers.

Some observers are concerned steel production may just become an energy cost arbitrage.

Citi believes we are still a few years away from the first commercial delivery of hydrogen-based DRI, and the speed and scale of the ramp-up will determine the timeframe for meeting net zero targets.

Back To BlueScope’s Sustainability Day

Macquarie offers the following observations on BlueScope Steel’s ((BSL)) progress on decarbonisation after the company’s sustainability focused investor day and a site tour of its Port Kembla operations a few months ago.

BlueScope advised it plans to be net zero by 2050, but the broker says this depends on several external enabling factors such as: accessible and affordable renewable energies, transmission technology and access to green hydrogen. 

The company does not score many points for ambition, or innovation, on this front, relative to many global rivals. Management advised natural gas direct reduced iron could reduce emissions by up to -60% in the interim.

But Macquarie observes the tightening domestic supply of gas and commitments to export existing supply. 

The analyst adds the slow renewables build-out to free up gas supply, is an added challenge for BlueScope.

To put this in perspective, BlueScope’s current operations use 1 petajoule a year, while natural gas DRI uses 40 petajoules a year, and the ACCC forecasts a gas shortfall of up to -300 petajoules in southern states by 2034. 

BlueScope says any transition to gas will not occur prior to 2030.

Another perspective on all of this is that a hydrogen DRI furnace requires 220,000 tonnes of hydrogen a year. An electric arc furnace consumes 816kWh a ton, while hydrogen generation requires 2633 kWh a tonne.

Meanwhile, the company advises it has improved its emissions intensity by 8% between FY18 and FY23, thanks to asset optimisation and technology evolution. 

The company has set an interim target of a -12% decrease on emissions from FY18 levels by 2030, so the company isn’t pushing too hard. 

Investors do like to see interim targets being set but at this stage, they are pushing for mid-2020s targets.

BlueScope Steel still has its collaborations with Rio Tinto ((RIO)), Tata Steel, ThyssenKrupp Steel, POSCO and China. It also has its own hydrogen electrolyser and green gravity lab trial on the burn.

Management expects the company’s NZ electric arc furnace to be operational by 2026 at a cost of -NZ$300m, nearly half of which is funded by the NZ government. This will cut NZ Steel’s Scope 1 and Scope 2 emissions by more than -45%.

Management confirmed its Safeguard Mechanism reforms are largely in place, and points to the government’s $200m primary steel-making fund, expecting the company will qualify for lower baseline decline rates. 

The company also backs the introduction of a carbon border adjustment mechanism to protect its Australian markets from non-green competition.

Macquarie observes that, while doing relatively little to advance steel decarbonisation compared to market leaders, the company is set to benefit from transition opportunities in the build-out of sovereign manufacturing capabilities for renewables infrastructure. 

Macquarie observes these include plate processing (already in place), with assessments being undertaken for wind tower fabrication, plate mill modernisation, and solar componentry. PKSW pipe and tube mill operations are under construction.

So all up, it appears the company will be a net beneficiary from the decarbonisation process so long as it doesn’t lag too far behind the global pack, especially given the bulk of its production is for domestic use.

Morgan Stanley Examines Rio Tinto’s Decarbonisation Plans

Morgan Stanley explores Rio Tinto’s decarbonisation requirements. The broker estimates that emissions from the company’s iron ore business are just above 3mtpa. 

Management has advised the bulk of its decarbonisation efforts will rely on a shift to renewables and it is estimated more than 1GW of renewable capacity will be needed to cut the company’s emissions by -50%. 

Displacing emissions from gas alone, would require roughly 600MW of renewable energy. 

All up, about one third of the company’s emissions are sourced from natural gas and two thirds from diesel (one third of which is generated by trucks, another third from rail and the final third from other sources).

As for the renewable investments, management advises it is open to either direct ownership of renewables or purchases from third parties, which would determine whether the costs would be reflected in capital expenditure or operational expenditure, observes the analyst.

Rio Tinto has built a 34MW solar farm at Gudai-Darri, giving a sense of the scale of the exercise, and a further 300MW is in advanced study.

The company has also started monitoring wind options to explore further renewable additions and is conducting battery electric truck trials with pilots to be deployed in FY24 to FY25. 

On the innovation front, Rio Tinto has chosen bio-iron as its pet project.

Morgan Stanley observes the percentage of Rio Tinto’s iron ore in the Pilbara suitable for electric arc furnaces is only 5% and says the company is relying on technology enabling the use of medium-grade materials to decarbonise.

The bio iron concept uses biomass combined with microwave technologies to remove oxygen.

The product is a high-grade iron ore suitable for hydrogen-DRI-driven electric arc furnaces, and constitutes only about 5% of total global supply.

Hence, the analyst believes the ability of that route to dominate the landscape is limited.

Rather, Morgan Stanley expects it will be alternative technologies that will drive innovations using medium-grade materials.

Rio Tinto expects eventually the market will divide into ironmaking and steelmaking with ironmaking likely to occur in hubs with low-cost energy, which will be transported in the form of hot briquetted iron to steelmakers.

Fortescue Metals Group Approves Green Iron Trial

Rio Tinto’s bio iron play compares with Fortescue Metals’ pet project of creating green iron, which uses a catalyst to convert low-grade ores to higher grade ores. Boston Metals in the US also has a catalytic green iron project on the run.

Fortescue Metals has claimed success in the laboratory with its green iron technology and is developing a pilot.

The company just announced a final investment decision to proceed with the Green Iron Trial Commercial Plant at its Christmas Creek iron ore plant in Pilbara, Western Australia at a cost of -US$50m.

The company hopes to produce 1500 tonnes of green iron a year at the plant, which is fired by green energy.

It won’t be too long now before investors will be able to determine which company (Rio Tinto or Fortescue) laid the best bet.

As an aside, Chairman Andrew Forrest used the announcement to urge the Federal Government to block Woodside Energy's ((WDS)) $16.5bn Scarborough project, citing emissions.

Net Zero Standard for Diversified Mining

Australia’s mining sector is also preparing to decarbonise.

Climate Action 100+ published its draft Net Zero Standard for transition metals – a sector first.

BHP Grouo ((BHP)), Rio Tinto, South32 ((S32)), Allkem ((AKE)), Champion Iron ((CIA)), IGO Ltd ((IGO)), Iluka Resources ((ILU)), Mineral Resources ((MIN)), Piedmont Lithium ((PLL)) and Resolute Mining ((RSG)) all contributed to the draft.

The standard is designed to help investors evaluate progress of diversified mining companies against target in a complex sector and is expected to be finalised in the March quarter.

It includes 100 metrics aligned with the 11 indicators of CA100+s Net Zero Company Benchmark. These metrics include:

-Net zero ambition
-Long-term GHG reduction target
-Medium-term GHG reduction target
-Short-term GHG reduction target
-Decarbonisation strategy
-Capital allocation
-Climate policy engagement
-Climate governance
-Just transition
-TCFD disclosure; and
-Historical GHG emissions reduction

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future: 
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/

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