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Rio Tinto’s Restructuring Signals a Global Industry Step Away From Coal

March 03, 2015
Tim Buckley

In announcing an abrupt restructuring and executive downsizing last week, the global mining giant Rio Tinto openly signaled its move away from coal-mining.

As part of the changes, Rio’s coal and copper operations will be combined, while uranium will be added to the diamonds and minerals group. More important is the immediate departure of the company’s Energy Division Chief Executive Harry Kenyon-Slaney, a long-time coal enthusiast.

As a top global energy executive who had tirelessly maintained the view that the world cannot afford to reduce its dependence on coal, his exit speaks volumes. RIO’s decision to part ways with Kenyon-Slaney represents a major shift in strategy by one of the world’s largest coal miners and in essence by the industry itself. Kenyon-Slaney was appointed chairman of the World Coal Association in May 2014 and a director of the Coal Industry Advisory Board to the International Energy Agency in 2013. That board has been stacked traditionally with coal and coal-fired-utility representatives—hence why we think the IEA has resisted any suggestion that coal and nuclear are not key to future electricity systems globally. His diminishment is a diminishment for the coal industry in general.

Kenyon-Slaney’s departure through “downsizing” is also a good example of how corporate board actions often express truths that management will not otherwise concede.

This can be seen in BHP’s spinoff of South32, a company that is made up of holdings BHP no longer wants, and a move that halves BHP’s exposure to coal. It can be seen also in RIO’s write-off of coal holdings in Mozambique, its sale of the Clermont coal mine in Queensland, Australia, and its moves to reduce its coal exposure in the U.S. and Mongolia.

It’s a trend that is reflected broadly. Anglo-American says it is committed to Australia, yet it is testing the waters on the sale of four of its Australian coal mines. Peabody Energy, whose core business is coal, is reporting massive losses year in, year out, and has cut its capital-expenditure program to essentials only, down 80 percent from 2012.

Meantime, Glencore moved last week to cut its Australian coal production in 2015 by 20 percent, the first serious corporate-miner move to address the huge global oversupply of seaborne coal. Unlike its three-week holiday slowdown at the end of 2014, this is a material change, and Glencore will be praying that BHP, RIO, Peabody and Anglo-American all follow its lead this time. (A side note on Glencore: The Wall Street Journal this week under the headline “Glencore Faces Hit From ‘Big Play’ on Coal” points out that Glencore’s market value has fallen by 10 percent to $60 billion since it acquired Xstrata in a huge coal-expansion acquisition in 2013)

The takeaway in sum is that five of the world’s largest mining conglomerates are rapidly reducing their coal exposure as the horses bolt the burning barn. New cost-cutting programs will remain the industry norm through 2015. In Australia, with very expensive mine labor costs and impossible-to-renegotiate collective-bargaining agreements, this will mean massive additional jobs losses at coal-mining companies and their associated service providers.

It’s late in the game, but governments should be moving with haste now to put economic-transition plans in place.

Tim Buckley is IEEFA’s director of energy finance studies, Australasia.

Tim Buckley

Tim Buckley, Director, Climate Energy Finance (CEF) has 30 years of financial market experience covering the Australian, Asian and global equity markets from both a buy and sell side perspective.

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