Steel, water and iron ore lay a minefield for Aussie resources

When it comes to ESG risk, Australia’s mining majors, BHP, Rio Tinto and Fortescue Metals Group, face exposure on all fronts of the environmental, social and governance spectrum. Carbon emissions, high water use, land disturbance, worker strikes, and community backlash: the list of risks is meaningful.

Many of these risks, however, are already factored into valuations, says Morningstar’s Mat Hodge in a special report this week. Take water dependency, for instance. BHP and Rio Tinto face water use risk in building their Escondida copper mine in northern Chile, home to the driest desert on earth. But they manage this risk by building desalination plants, which means seawater is now used instead of groundwater.

Similarly, in an industry with a high level of unionisation, strikes are common and can hinder production levels, but they conversely provide a benefit to price if supply is tighter than it otherwise would have been. And of course, the tailings dam disasters in Brazil have forced miners to improve construction standards.

Of the three miners, Fortescue carries the most ESG risk, chiefly because of the high emissions from steelmaking. “Fortescue produces a materially lower grade iron ore which requires more energy to produce the same amount of steel,” Hodge says.

There is a push to “decarbonise” steelmaking, but it’s unclear who’s leading the charge. And the decarbonisation effort itself will require infrastructure, which requires steel. While this is being figured out, demand remains high: the iron ore price rose on Thursday, buoyed by data showing a record monthly output of crude steel and as China said it sees room for further growth in demand.

“The shift to a lower carbon economy is also expected to impact demand for certain products,” Hodge says. “Currently, there are no alternatives to steel, a commodity that is necessary to build infrastructure required by decarbonisation. This leaves the miners' crown jewel, iron ore, and metallurgical coal somewhat protected from this headwind. Demand for steel is not particularly price sensitive. Likewise, BHP and Rio could benefit from stronger demand for copper and nickel catalysed by electric vehicles and green energy generation.”

Morningstar valuations for Australia’s major miners

Source: Morningstar Direct; data as of 18 June 2021

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