At a time when fossil fuels are receiving such bad press, mining group Rio Tinto is going against the tide by growing its coal business.
Preston Chiaro is Rio Tinto’s chief executive of energy. Based in London, he overseas the British-Australian company’s energy and mineral group, one of the mining giant’s four product groups, which also include iron ore, copper and aluminium.
Rio Tinto is the world’s second largest private coal and uranium producer. The coal, uranium, industrial minerals and titanium that Mr Chiaro’s group produces represent 10% of the company’s global earnings, and he has been charged with the task of increasing its current share of sales.
Contrary to the emerging environmental philosophies of many in the West, Mr Chiaro firmly believes that carbon is a growing business opportunity. “Coal is, of course, under pressure because of climate change issues but nevertheless, coal use around the world continues to increase – mainly driven by China and India, but demand also continues to grow in Europe and the US,” he says.
Growth will be ensured by the need for energy security, says Mr Chiaro. “Coal is a low-cost energy source, it is easy to store, the technology around using it is very well known, and the technology and regulations around reclaiming the land after the coal is mined are well developed,” he says. Even China, which has been criticised for its coal production safety, has improved its record in the past few years, according to Mr Chiaro.
The greenhouse gas emissions issue does, however, have to be addressed. To this end, Rio Tinto has a number of initiatives going on around the world, including participating in the development of government policies on greenhouse gas in the US, Australia and Europe.
Rio Tinto has also invested in technology development through a 50/50 joint venture company with BP called Hydrogen Energy. “The whole purpose is to take high carbon feed stocks like coal, separate out the CO
to generate clean power from the resulting hydrogen, then take the CO
and store it underground, initially for enhanced oil recovery but later in secure long-term geologic reservoirs,” says Mr Chiaro.
And in response to those who advocate a ban on fossil fuel sources, he says eliminating any single energy source is unwise. Global energy demands will more than double by 2050, according to the International Energy Agency, and there are only a few primary energy sources: fossil, nuclear or renewables, says Mr Chiaro.
“In order to satisfy the world’s energy demand, all of those will need to be pursued as well as energy efficiency,” he adds.
The end users for Rio Tinto’s products are everywhere. In terms of coal, China is growing the fastest, accounting for about 17% of sales and growing – although the US remains a huge market, together with Japan and Korea.
Most of Rio Tinto’s investments historically have been in developed markets, such as in Australia and North America. Looking forward, however, most of the big new projects are in emerging economies, says Mr Chiaro, which have their challenges as well as their benefits.
In Namibia’s Rossing uranium mine, the company needed to build capability to operate a very sophisticated site, which involved mining a highly sensitive material. “Our preference is always to build that capability locally though often we have to bring in outside expertise to get things started,” says Mr Chiaro. Even at the outset of a development, a skilled workforce is required because technology advances mean qualified operators are required at all stages of a mine development.
Local co-operation with suppliers can also contribute to capacity building in markets such as Namibia. At Rossing, Rio Tinto awarded a contract for bags to carry finished products for shipment overseas to a local supplier even though its price was too high. “We selected them under the condition they undergo a business improvement process to improve their supplier chain and processes so that they could reduce their costs and become more competitive globally,” says Mr Chiaro.
Other problems include uncertainty around regulation and legislation, as developing countries often don’t yet have a mining or regulatory regime in place.
Another question to be addressed is how multinationals should share the benefits of emerging economy developments fairly with local populations, national government and shareholders. “The best way to make the decision is to properly engage all the stakeholders to discuss the fairest way of splitting future benefits,” says Mr Chiaro.
Lack of infrastructure
Poor infrastructure is another hurdle, and one that Rio Tinto is encountering in Guinea, where Mr Chiaro’s group is trying to develop a very large iron ore find. “The rail lines are not sufficient to haul large iron ore loads so we have about 1000 staff on the ground working with the country to develop rail and port infrastructure,” says Mr Chiaro. Obviously the government wants the infrastructure to be available for broader development beyond Rio Tinto’s operation and the amount of rail capacity devoted to the company is under negotiation.
Striking a balance
There is a fine balance when working with governments, including current negotiations in Guinea and Mongolia, to help build capability, expertise and fair mining law regimes to ensure the location still remains attractive enough for foreign investment.
Going forward, Mr Chiaro believes higher living standards in China and India will underpin huge carbon resource demand. Markets are driving the demand for products that Mr Chiaro believes will continue despite the economic hiccup in the US economy, which, he says, seems to be mostly decoupled from what is happening in China and India.
“Beyond markets, what it really comes down to in developing countries is capacity building through strengthening the education system to ensure a well educated workforce, getting appropriate laws in place for regulating the mining activities we undertake and agreements for fair sharing of developments,” says Mr Chiaro.
RIO TINTO GROUP
Business activity: International mining
2007 company turnover: $29.7bn
Company structure: Dual listed company of Rio Tinto plc, headquartered in London, and Australian Rio Tinto Ltd, with executive offices in Melbourne