Rio Tinto is a global diversified mining company that produces many of the metals and minerals essential to the world economy. Among these is thermal coal, an energy source that generates 28% of electricity globally. Most of Rio Tinto’s thermal coal is sold in Asia, a region where energy demand is growing rapidly. However increasing concern about climate change is calling into question the future of coal as an energy source. Some commentators are even saying that coal mines will eventually become “stranded assets” as regulations make them uneconomic to run. Should Rio Tinto exit coal mining altogether?
Rio Tinto is no stranger to the effects of global warming. In both 2011 and 2012 Queensland, Australia’s largest coal-producing state, was hit by heavy rains and severe flooding. Numerous open-pit coal mines had to be shut and a number of coal miners invoked force majeure in their supply contracts. The incidence of extreme weather events is likely to increase with global warming and lead to increased operational disruptions.
Regulatory efforts to limit the impact of climate change have created significant uncertainty about future demand for coal. The consensus view is that energy demand globally will continue to rise, but opinions vary widely about what share of that demand will be met by coal. IEA expects coal’s share of the energy mix to represent 30% by 2040, whereas BP expects coal’s share to fall to less than 25% as soon as 2035. There is a risk that power generation will transition away from coal-fired power plants to alternative technologies. The result would be a slow and terminal decline in demand for coal, which would also put significant pressure on coal prices and the profitability of Rio Tinto’s operations.
Some competitors have already stopping investing in coal. BHP Billiton, Rio Tinto’s main rival, said in 2012 that it would limit investments in its coal division. If Rio Tinto believes there is a future for coal, it should use this opportunity to pick up assets being disposed by its competitors. Yet for a public company with a broad shareholder base, the optics of this route are untenable. Important investors like Norway’s government sovereign wealth fund and Calpers have said they are divesting from coal. Rio Tinto is not immune to the prevailing winds, and increasing its exposure to coal may be widely criticised by its shareholders and the press. In response to an overall downturn in the coal market, Rio Tinto announced $0.8 billion of coal divestments in 2015 and 2016.
However these divestment efforts do nothing to address the question of energy poverty in emerging markets. 1.6 billion people in developing countries live without electricity in their homes, and Southeast Asia is one of the most energy-deprived regions in the world. In the absence of credible and low-cost alternative technologies, coal has a role to play in the world’s energy mix. Rio Tinto has acknowledged as much in its annual report: “coal is a cost-effective and abundant energy source that will continue to be part of the global energy solution for years to come.”
Propagation of clean coal technology and an increase in power plant efficiency can significantly reduce the emissions created by the burning of coal. Rio Tinto has to date spent over A$100 million on R&D in carbon capture and storage technologies.
At this time Rio Tinto remains invested in coal very much as a passive shareholder. Rio Tinto could arguably do much more to advocate coal remaining a part of the global energy mix. Major oil and gas companies have banded together and joined the debate to identify how they can play a part in limiting the effects of climate change. Why shouldn’t Rio Tinto do the same for coal?
 International Energy Agency, 9 August 2016, IEA data shows global energy production and consumption continue to rise
 University of Oxford, Smith School of Enterprise, 2015, Stranded Assets and Subcritical Coal
 Reuters, 11 January 2011, Q+A: Australia’s coal industry hit by Queensland flooding
 Reuters, 3 February 2012, Coal mines shut as Australia evacuates flooded towns
 BP Energy Outlook to 2035, 2016 edition
 International Energy Agency World Energy Outlook, 2015 edition
 Financial Times, 22 September 2015, Funds worth $2.6tn pledge to dump coal
 Birol, Fatih. 2007. Energy Economics: A Place for Energy Poverty in the Agenda? The Energy Journal
 Franco, A; Diaz, A. 2009. Elsevier. The future challenges for “clean coal technologies”: joining efficiency increase and pollutant emission control.
 Bloomberg, 20 May 2015. Oil Giants Band Together to Add Voice to Climate Debate