BHP’s Carbon-heavy Bid for Anglo-American

Miner’s attempt to buy Anglo-American has been pitched as a copper deal, but would create a huge coal producer, exposing investors to potential stranded asset risk.

Mining giant BHP’s bid to acquire Anglo-American would create the world’s biggest shipper of metallurgical coal and a global mega-polluter, exposing shareholders to stranded asset risk as the world moves away from fossil fuels.

This is a particular danger if steelmakers solve the problem of decarbonising steel faster than BHP assumes, and if carbon capture, use and storage (CCUS) – which could extend the life of dirty blast furnaces – fails to take off, as think tanks the Institute for Energy Economics and Financial Analysis (IEEFA) and Agora warn is likely.

Stranded asset risk – the risk that assets will become worthless due to a collapse in demand – has been a key concern for institutional investors when it comes to thermal coal used in electricity generation, and many have screened out exposure. But steelmaking coal is seen as a safer investment because there are no commercially viable ways of turning iron ore into steel without the fossil fuel. IEEFA’s report challenges this view.

Australia-based BHP, the world’s biggest miner, offered to buy London-listed Anglo-American last month in an all-share deal that valued the company at £31 billion (US$39 billion). Anglo-American rejected the offer saying it was undervalued, but BHP is expected to increase its offer.

Most commentary has focused on the copper component of the proposed deal, a positive public-relations angle for BHP given the red metal’s central role in the clean energy transition.

But the deal would have a dirty side. Both companies have large metallurgical coal and iron ore divisions, supplying the carbon-spewing steel mills of China, India, Japan and South Korea. Steel is one of the world’s most polluting industries, producing around 8% of global carbon emissions.

Combining the two companies would result in annual emissions of around 490 million tonnes of carbon dioxide equivalent a year, analysis of each firm’s 2023 annual reports shows.

That’s equivalent to the emissions of a mid-sized industrialised country (well above the UK’s total annual greenhouse gas emissions, and about level with notoriously high-emitting Australia). This enormous, hard-to-abate carbon footprint is set to be an ongoing ESG headache for the firm – even as it spins off or shuts down its dirtier mines.

Most of the companies’ emissions come in the form of Scope 3 – emitted by the miners’ steelmaking customers. In BHP’s case, Scope 3 emissions from iron ore represented an eyewatering 283 million tonnes last year (on par with Spain’s total emissions), and from its metallurgical coal about 29 million tonnes. Meanwhile, Anglo-American’s Scope 3 emissions from processing iron ore were 51 million tonnes.

Steelmaking coal still ‘essential’

Iron ore is not intrinsically carbon-emitting. The ore itself contains no carbon, and if alternative methods for manufacturing steel using hydrogen or electricity instead of coal were scaled up, then it could theoretically be zero-emission.

But coal – which is made of carbon and hydrogen – can only be decarbonised using CCUS technology. That requires capturing the carbon dioxide emissions at the steel mill and either transporting them into depleted underground oil and gas reservoirs, often thousands of miles away, or using the carbon dioxide for industrial purposes. It’s a technology that has proved technically difficult and expensive, and its use in the steel sector has been negligible.

BHP and Anglo-American justify their metallurgical coal operations on the grounds that there is currently no viable way of mass-producing steel without coal, and steel is needed to build clean energy infrastructure – along with its traditional uses. While both are investing in green steel technologies, they insist these are a long way from widescale adoption.

“We believe a wholesale shift away from blast furnace steelmaking, which uses metallurgical coal, is still decades in the future,” BHP said in its most recent annual report. “As a result, metallurgical coal will remain an essential input into the steelmaking process and a critical input to support decarbonisation infrastructure over the coming decades.”

Each company also argues the coal they mine in Australia is “high-quality” – which means the carbon emissions per tonne of steel produced are lower than poorer-quality alternatives. This gives their coal an advantage as steelmakers look for ways to reduce emissions.

The investor angle

So far, these arguments have persuaded investors. While many asset owners, insurers and banks screen out thermal coal used to generate electricity (for which there are numerous cleaner alternatives), screens on metallurgical coal are less common. But IEEFA claims BHP’s argument is flawed, and that the companies may be underestimating the risk that coal mines could become stranded assets.

“BHP’s hope that hard coking coal will be in demand for decades is at least in part based on its continued belief that CCUS will play a meaningful role in decarbonising blast furnace-based steelmaking and maintain demand for metallurgical coal,” IEEFA Lead Analyst Simon Nicholas said. “This is despite an abundance of evidence to the contrary.”

In a report last month, the IEEFA argued that CCUS had by and large been a failure, and was unlikely to outcompete alternative green steel technologies. The most promising green steel technology developed to date adapts an existing technique called ‘direct reduced iron’ (DRI), which uses hydrogen to reduce iron ore into iron before using electricity to turn it into steel. German think tank Agora also predicts that DRI will outcompete CCUS.

Although some European groups, including Sweden-based joint-venture HYBRIT, have started to adopt the technology, major impediments to wider adoption remain. To roll it out at scale, huge amounts of green hydrogen will need to be manufactured, which in turn will require huge amounts of renewable energy to be developed. This is not yet happening at anything like the scale required.

In addition, the existing DRI technology requires very high-grade iron ore, of which there is simply not enough being mined around the world today. BHP’s iron ore, incidentally, is not suitable – though the company is looking for ways to change this.

Finally, if hydrogen-based steel were to replace coal-based methods by mid-century – in line with net zero goals – countries like China and India would probably have to shut down multiple blast furnaces long before they reached the natural end of their life, and replace them with costly DRI plants and electric arc furnaces. One can anticipate the issues this may trigger.

Another low-carbon option is CCUS, but even with a strong carbon price such as the one in place in Europe, investment has so far failed to flow into this. A final option that would ensure the future of BHP’s coal business would be simply to maintain the status quo – and continue pumping CO2 straight into the atmosphere.

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