BHP is being scrutinised for its Climate Transition Action Plan which sets a net zero operational emissions target by 2050 with medium term targets for 2030. The company’s Scope 3 emissions massively exceed its internal Scope 1 and 2 emissions mainly due to the use of iron ore and metallurgical coal in steel making. But there are also opportunities for BHP under climate change initiatives that require very large amounts of basic commodities that the company produces.
Climate change action is presenting BHP with two diametrically opposed issues. One brings a large cost while the other offers a large opportunity. The company emits significant amounts of greenhouse gases through its own operations, but substantially more through its customers, mainly due to the use of iron ore and metallurgical coal in steel making.
Emissions from steel making account for 7-10% of global total estimated emissions, according to the IEA. In FY21, approximately 300mt of CO2e (about 75%) of BHP’s Scope 3 emissions were from iron ore (FeO) and metallurgical coal. BHP’s FeO and metallurgical coal is processed almost exclusively in blast furnace-basic oxygen furnace operations which represent approximately 72% of global steel production. BF-BOF is favoured because of its efficiency and operational flexibility enabling the use of a broad range of FeO quality. But BF-BOF is about 5x more emissions intensive than scrap based EAF (electric arc furnace) and 2x more emissions intensive than Direct Reduced Iron EAF.
Achieving BHP’s emissions reduction targets will not be easy, or inexpensive.
The capital spend for decarbonisation projects will amount to approximately US$100-200 million pa over the next five years. BHP expects potential capital spend on decarbonisation to FY30 to be in the range of US$2-4 billion.
BHP’s capital spending commitments on emissions reduction will need to fit into the group’s Capital Allocation Framework which is shown in the table below:
BHP’s FY22f capex guidance is approximately US$9 billion (minerals ~US$6.7bn, Petroleum ~US$2.3bn) so the quantum of spending on the Climate Transition Action Plan is relatively minor in context. But cumulatively, it will become an important factor to monitor, particularly with reference to the indirect benefits.
The group’s plan is summarised in the following table:
BHP’s copper division is expected to produce between 1,590-1,760kt in FY22 (1,636kt FY21) with copper prices heading higher (currently US$4.50/lb cf US$3.81/lb in FY21). BHP’s copper earnings (EBITDA) sensitivity to a US1c/lb change in the copper price is approximately US$36 million. The company expects to produce about 1,200kt pa in the medium term. BHP delivered US$8.5 billion EBITDA in FY21 from the copper division from its key assets at Escondida, Olympic Dam, Antamina and Pampa Norte with long term unit costs expected to be around US$1.10/lb. All these assets are long life, low cost projects but BHP has other high quality copper options to consider, including Resolution Copper in the USA (BHP 45%, RIO 55%) which is one of the largest undeveloped copper projects in the world.
Investment view
Amidst the hoopla surrounding the dogma of ‘net zero’, it is worth understanding a few dichotomous facts about the commodities that BHP produces. Under BHP’s 1.5°C scenario, which aligns with the Paris Agreement, the world is expected to need almost twice as much steel in the next 30 years as it did in the last 30. Copper production will need to double over the same period to keep pace with the development of renewable technologies including electric vehicles and solar energy. Nickel production will need to quadruple to keep up with battery technology.
BHP has aligned its executive remuneration with its climate change strategy by allocating 10% of its cash and deferred plan. This includes actions to address Scope 3 emissions which are, by definition, not under BHP’s control.
At this year’s annual meeting, BHP will offer a non-binding ‘Say on Climate’ to its shareholders referring to the Climate Transition Action Plan. Press coverage is suggesting this will attract some vigorous debate that the plan is insufficient action in some people’s eyes. The first indication of this may come from the BHP Plc annual meeting in London on 14 October and then at the BHP Group annual meeting on 11 November in Australia.
Investors should bear in mind the opportunities for BHP given its premium position in global commodities production against the costs required to achieve net zero emissions by 2050. The latter factor is achieving plenty of emotive attention at the moment but our view is the assets of the company provide a compelling argument for long term investment. We retain our Hold recommendation but with a positive long term view.
