Industry Trend Analysis - Regional Metals & Mining Outlook For A Low Carbon Economy - SEPT 2017

BMI View: Asia will be the largest contributor in terms of mining-related carbon emissions, prompting significant regulatory and investment efforts aimed at tackling those emissions moving forward. Developed markets in the Americas and Europe will benefit from a larger proportion of renewables in their energy mix and more advanced technology that will make regulatory changes easier to incorporate, while Africa will continue to lag behind on these fronts.

Asia will remain the largest emitter of carbon from mining activities in the coming years due to the important presence of metal processing and smelting in the region, which represent the main source of greenhouse gasses (GHG) in the mining industry (see chart below). The processing of ferroalloys and ores to make steel in blast furnaces requires large amounts of external fuel, often in the form of coal, and is therefore considered to be among the dirtiest air pollutants. Other metals including nickel, lead or copper are less energy intensive when manufactured through a process called flash smelting, but also expel high levels of sulphide oxide, a key contributor to GHG.

Industrial Metal Processing To Dominate Emissions
Vale Sustainability Report - Company Emissions Breakdown, CO2 Million Metric Tonnes
Note: Scope 2 refers to emissions from sources not directly owned by Vale. Industrial Process refers to emissions from production of nickel, copper, ferroalloys, among others. Source: Vale Sutainability Report, BMI

Chinese Heavy Industry To Be Main Culprit

As the largest producer of metals in the world, Chinese industrial metal activity will drive Asian carbon emissions and contribute 42% of global metals production across ferrous and non-ferrous metals during 2017-2021. In contrast, industrial metal activity in Europe and the Americas will lag considerably. For example, in 2017 China will account for 50% of the global steel market compared to USA's 5% and Russia's 4%, which are both the largest steel producing countries outside of Asia. African markets meanwhile, will remain the lowest emitters in this regard due to minimal metal smelting or refining industry across the continent.

China Dominating Across Metals
Select Countries - % Of Global Metals Output (2017, estimate)
Source: BMI, USGS

Another key source of carbon emissions from Asia's mining sector will be the region's continued energy reliance on coal. Coal mining is a major pollutant, as pockets of methane may be released during extraction, while the fossil fuel also emits GHG when burned as a key component of steel-making and electricity generation. The largest coal miner in the world, Glencore, estimates in a 2016 sustainability report that up to 35% of the company's carbon emissions emanate from coal mining activities ( See 'King Coal Will Not Let Glencore Down', June 23 2017) . Despite our view that coal will lose dominance over the years due to the emergence of renewables, our Power Team expects coal to remain the largest source of power globally, forecasting the fossil fuel to account for 35% of global electricity generation by 2026. Competitive prices will ensure that coal usage remains elevated in developing countries, particularly among fast-growing Asian economies including China, India, Indonesia, Vietnam or Pakistan. As such, coal mining will remain a significant component of many miners' future business models in Asia, as evidenced by Glencore's 16.6% acquisition of China's Yanzhou Australian coal assets in late July 2017. On the other hand, the fossil fuel will continue to lose prominence in developed markets where coal already only represents less than 30% of total electricity generation (in the case of North America and Europe).

Asia To Remain Coal King
Select Regions - Coal Production (% of total electricity generation)
Source: BMI, USGS

Regulatory Shake-Up To Boost Asian Renewable Investments

The shift to the low carbon economy will have a significant impact on the regulatory frameworks of most major mining markets, as governments commit to their Nationally Determined Contributions (NDC) of the global Paris Climate Change Agreement. The Climate Change pact was adopted by 195 countries at the COP21 UN conference in Paris on 12 December 2015 and aims to hold average temperature increases to below 2deg Celsius by supporting the participating countries to reduce their emissions progressively. Asian governments will face considerable challenges on this front, where major mining countries including China and Australia remain largely reliant on fossil fuels (primarily coal) for energy generation. China, in particular, will ramp up environmental regulations that will focus on curbing the use of coal and metal smelting as part of the government's commitment to reduce 40-45% of GHG emissions by 2020. A key element of this objective is the national carbon trading scheme announced in July 2017 which may lead to a disruption of coal consumption patterns. This system creates a carbon market where caps are implemented and, if these limits are exceeded, emitters will require an allowance to buy and sell emission credits which are then monitored and reported.

Environmental Crackdown To Weigh On Chinese Metal Production Growth
China - Select Metals Production Growth (tonnes, % y-o-y change)
National Sources/BMI

More broadly, the Chinese government will prioritise the gradual policy shift away from heavy industry in the coming years as authorities look to reduce heavy smog levels ( See '19 th Party Congress: Key Implications', August 15). This will weigh on metal production, as evidenced by closures of steel, aluminium and tin smelters across the country over the past few months. As recently as August 16 China Hongqiao, the world's largest aluminium maker, confirmed it will cut up to 2.7mnt of outdated aluminium capacity to comply with environmental regulations. Earlier in July, local authorities ordered the shutdown of various tin smelters in Yunnan province in a bid to reduce air pollution and over-capacity. The government will also continue to crackdown on steel smelters, with big steel-making cities such as Tangshan and Handan ordered to cut output by as much as 50% before the winter season starts in October. As these capacity cuts increase, China will have to ramp up investment into new technology that will allow the country to maintain adequate metal supplies while reducing carbon footprint.

Within Asia, Australian miners will also make important strides in terms of mining renewables investment, aided by favourable government policies and climate conditions ( See 'Australian Miners To Lead Global Mining Technology Boom', July 1). For instance, in June, Sandfire Resources's solar power project at the DeGrussa copper mine became fully operational, reducing diesel use by approximately 20%. The project will receive up to USD 15mn from the Clean Energy Finance Corporation and USD20.0mn from the Australia Renewables Energy Agency.

Asia To Lead Investment In Renewables For Mining
Select Regions - Renewable Energy Investment In Mining Industry (USDmn)
Source: EY, Navigant Consulting, Inc.

Europe Ahead Of The Curve

Metal producers in Europe will experience a smoother transition to a low carbon economy, supported by the region's advanced smelting technology and consistent policy approach. In Europe, the European Commission released an Energy Market Reform plan in November 2016 that commits to reduce emissions by 40% by 2030. As part of this plan coal companies from every EU nation except Greece and Poland pledged to not build any new plants from 2020. Carbon emission cut pledges will be easier to adopt in Europe than in Asia due to a more harmonised approach to regulations, which are implemented across the region through a central regulatory actor in the form of the EU. Given the increasing use of electric arc furnaces in the continent, which are much less energy intensive and therefore emit less carbon in the steel-making process, incorporating stricter environmental regulations in metal manufacturing will prove easier for European producers. According to the European Commission up to 50% of steel mills in the EU already use electric arc furnaces in their steel production activities.

Renewables Lagging Behind In Asia
Select Regions - Generation, Non-Hydropower Renewables, % of total electricity
Source: BMI

Americas To Tighten Environmental Regulations, While SSA Lags Behind

In the US, despite President Trump's decision on June 1 to withdraw from the Paris Agreement, BMI's Power team believes this will not change the long-term direction of the US power sector, which will continue to see a growing presence of renewables to the detriment of coal ( See ' Impact of US Withdrawal From Paris Agreement Will Be Limited ' , June 2 2017). This will result in relatively lower expenditure on renewables in the mining sectors of developed markets as the low carbon shift is already structurally underway ( see chart above). Other countries in the Americas, including Chile, Colombia and Canada introduced carbon pricing initiatives in 2017.

Meanwhile, Sub-Saharan Africa will be less exposed to mounting regulations due to the smaller presence of carbon emitting industrial metals activity, although coal dependence will leave the region exposed to carbon emissions curbs. In this regard, South Africa has also pledged to implement a carbon pricing scheme in 2018.

Select Countries - Mining Data & Environmental Policy
Country MIV (USDbn) Mining Industry % of GDP Key Minerals GHG Emissions (mnt) National Carbon Pricing?
Note: MIV = Mining Industry Value. ETS = Emissions Trading Scheme. MIV data from 2016, Emissions Data from 2015. Source: World Bank, Global Carbon Atlas, BMI, USGS.
China 246 2.2 Coal, steel, aluminium 10,357 Proposed ETS
Russia 195 15.2 Coal, nickel 1,617 No
US 108 0.6 Coal, copper 5,414 No
Indonesia 73.4 7.9 Nickel 5,37 No
Brazil 46.0 2.6 Iron ore 515 Proposed ETS
South Africa 33.0 11.2 Coal, iron ore, PMG 462 ETS Scheduled for Implementation (2017/18)
Canada 21.5 1.4 Gold, nickel 557 Yes - Minimum USD10/ tonne
Chile 21.5 8.7 Copper 81 Yes - USD5/tonne