Smelters ‘stick out’ in Rio Tinto’s $1.5b push to cut carbon emissions

Rio Tinto will need to source cleaner energy for its highly carbon-intensive Australian aluminium smelters in order to achieve its tougher new emissions-reduction targets, unless it opts to divest plants instead.

This week the Anglo-Australian miner pledged to invest $1.5 billion over five years in initiatives to neutralise its greenhouse gas emissions by becoming a net zero emitter by 2050 and to reduce its direct emissions by 15 per cent within the next decade.

Rio’s jointly owned Tomago aluminium smelter is Australia’s largest.Credit:Virginia Star

However, while discussing the details of its push to decarbonise its global portfolio, Rio chief executive Jean-Sebastien Jacques acknowledged the company "has a challenge" in its Pacific aluminium business, spanning smelters in Australia and New Zealand. In 2018, the business unit accounted for 10.3 million tonnes of carbon dioxide equivalent, the largest amount of emissions in Rio's entire global operations.

While hydropower supplies electricity for many of Rio Tinto's smelters globally, its plants in Queensland and New South Wales are largely powered by coal-fired generators, the most polluting form of energy creation.

"Repowering our aluminium assets and increasing the share of renewable electricity more broadly will be central to our decarbonisation strategy to 2030," the company said.

Both smelters – Boyne in Queensland and Tomago in NSW – have been described by Rio as being on "thin ice" and facing the threat of closure as the company remains locked in negotiations over cheaper long-term power contracts.

Morgans analyst Adrian Prendergast said the Pacific Aluminium assets "stick out" in Rio's portfolio as "low-economic and highly carbon-intensive”, and would unsurprisingly be a significant hurdle in its emissions-reduction drive.

Glyn Lawcock, mining analyst at UBS, said: "We couldn't help but notice the closure of Pacific Aluminium alone would reduce emissions by approximately 25 per cent."

"Maybe this is the elegant solution to Rio’s desire to reduce CO2 as well as lifting margins within the aluminium business unit," Mr Lawcock said.

Pacific Aluminium reported an EBITDA loss of $US22 million in 2019.

'We couldn't help but notice the closure of Pacific Aluminium alone would reduce emissions by approximately 25 per cent.'

Although divestment would be the "simplest and quickest" option to eliminate its emissions, Mr Prendergast said he suspected Rio may encounter difficulties finding an interested buyer for such carbon-intensive and low-returning assets.

But Mr Prendergast said Rio also had the resources and the capacity along with plenty of time ahead of its 2030 target date to reduce the emissions intensity of its aluminium smelting assets through ongoing research and development with Alcoa to decarbonise the smelting process.

The two companies are in a Montreal-based joint venture, Elysis, which has been developing aluminium production technology that removes carbon dioxide from the process and emits only oxygen.

Processing alumina into aluminium is a highly energy-intensive and carbon emissions-intensive process, especially at smelters that source power from coal, including Rio Tinto's Australian operations. The aluminium industry accounts for as much as 1 per cent of global greenhouse gas emissions globally.

AustralianSuper, which owns Rio Tinto shares, said it had been engaging with Rio Tinto for more than two years ahead of its newly announced decarbonisation goals, unveiled as part of the Climate Action 100+ initiative.

"This a great demonstration of constructive engagement resulting in genuine outcomes on climate change," AustralianSuper's Andrew Gray said.

However, unlike top global miner BHP, Rio Tinto is refusing to commit to setting goals for its "Scope 3" emissions – the emissions generated by the customers of its producers, such as the steelmakers in China – which are vastly greater than emissions directly caused by its mining operations.

Market Forces' Will van de Pol has also cast doubt over the adequacy of Rio's direct emissions reduction target of 15 per cent by 2030, saying they appeared to "fall well short" of the sort of decarbonisation action required.

"The company's emission reduction plans amount to nothing more than economic decisions to improve efficiency and reduce costs, rather than ambitious change guided by an understanding of the decarbonisation required to limit warming to 1.5 degrees and avoid the worst impacts of climate change," Mr van de Pol said.

"Based on the company's current plans, investors must have serious questions about the sincerity of Rio Tinto's claimed commitment to climate action in line with the Paris Agreement."

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