We recently took part in a webinar organised by the Energy Institute which focused on the decarbonisation of critical metals.
Sonia, who is Global Client Director at IBM Global Markets, brought the digital perspective; Mark, General Manager for Mining Decarbonisation at Shell, brought the energy perspective; and I provided the mining viewpoint.
We made a great panel (you can watch the recording below) and, one point that Mark raised during the discussion stuck with me afterwards: decarbonisation in mining is not purely a challenge, it’s also a great opportunity for operational optimisation.
Many mining companies view decarbonisation as something that they have to do… just another, rather expensive, hurdle to jump, so I found this perspective refreshing and, naturally, wanted to know more.
The three of us got together on Zoom a few weeks later to continue the conversation…
Embedding change in organisations
“Mining companies often see decarbonisation as a cost and something that’s imposed on them rather than a cohesive part of their overarching business strategy,” Hannan explained. “But actually, it can offer a lot of cost benefits, as well as improving operations and the safety and experience of employees.”
He continued: “I’m a huge advocate for not having a separate team for climate change and sustainability. Instead, decarbonisation needs to be embedded in operations and company culture.
“It needs to be a core part of teams across the business, so that when we think about what the next 10 years will look like for a mine, it’s done with cost reductions in mind but also in the most sustainable and net-zero way.”
Van Ballaert agreed: “Operations are focused on optimisation – optimisation of costs, schedules, planning etc. – and I see decarbonisation as just another optimisation parameter. We need to ask how we can trade off all of these aspects against CO2 reductions.
“And yes, you will make different decisions which could slightly increase costs in one place, but then will give benefits elsewhere. We need to get more sophisticated in thinking around decarbonisation. It has to become a part of doing business.”
One way that companies in other sectors are doing this is through tying remuneration for employees across the business directly to CO2 reduction targets. Shell, for example, has linked the pay of more than 16,500 senior staff to targets to reduce carbon intensity of its energy products.
In mining, Vale has done something similar; scope 1 and 2 emissions reductions are linked to the variable remuneration of all its employees. And, in its 2019 annual report, BHP announced that it would “strengthen the link” between the remuneration of its leadership team and CO2 reduction targets.
Hannan believes that: “Until the directors of iron-ore or copper divisions at mining companies have decarbonisation targets linked to their pay, the focus will continue to be on production and reducing downtime.
“If CO2 reduction isn’t a part of that, then it will always be down to three or four sustainability people sitting in the head office trying to drive lasting change. And they won’t be able to because the strategy is setting them up for failure.”
The nuts & bolts of decarbonisation
Van Ballaert added: “Just like safety and cost reductions, decarbonisation needs to become part of people’s daily work. To do that they need to have dashboards so that they know whether they’re achieving or not.
“The reason decarbonisation is sitting at the corporate level in most companies is because it’s still one big tallying up exercise at the end of the year. Data management around emissions needs to get far more timely, reliable and standardised.”
Hannan raised an important point: “Most mining houses are headquartered in places like Europe or Canada that have tough CO2 reduction targets, but many of their mines are in countries that don’t have similar government policy or legislation. Do you think that’s part of the reason why there’s a reluctance locally to decarbonise?”
It’s true. In certain mining communities, take Africa or Latin America for example, some workers struggle just to put food on the table, and there are security concerns around metals supply. Decarbonisation is, understandably, not top of their priority list.
In these cases, a top-down model imposed through a western lens just isn’t going to work. We need to better understand the realities on the ground and apply a decentralised model to decarbonisation efforts.
It’s also recognised that governments in many developing countries are more focused on short-term profitability than decarbonisation and that is hindering some mining companies’ efforts in these regions. The question is: how can we incentivise those governments to be a part of the change?
On the flip side, in countries like Australia, some Tier 1 miners are actually ahead of government requirements on decarbonisation. In those cases, it’s worth creating consortiums to lobby the government into bettering their public policy, and also providing investment incentives to encourage the two parties to work more closely together.
In both cases, mining companies can, if they want, be an integral part of lasting, positive change.
Calculating the benefits
Another challenge lies in costing, and properly calculating the capital required to make the switch to low-carbon equipment and energy sourcing at individual mine sites.
Even at the largest mining companies, this can be a grey area. But, until we get our arms around the cost, we cannot accurately calculate the return on investment (ROI) of executing on the energy transition.
There are plenty of less easy-to-quantify benefits, particularly on the social side, which could be captured and considered too. Just because they’re harder to measure, doesn’t make them any less important.
“We need to get away from net present value calculations on these types of investments,” said Van Ballaert. “Because we have to do it anyway whether it’s tomorrow or ten years from now.”
In areas like sub-Saharan Africa, the geography and falling price of renewables should make a good business case for mines to switch to low-carbon energy sources like solar. A microgrid on site also makes it easier to manage energy supply and provides safety to workers.
However, a lot depends upon the life of mine and the possibility for ownership changes – some companies don’t want to commit to 10- or 15-year power purchase agreements.
But, in countries like Australia, the cost of electricity will soon be cheaper than that of diesel. These scenarios will require some CAPEX upfront, but the ROI will be swift. Here, on-site power generation isn’t a discussion point, it’s a quick win.
On the fleet side, things are a little more complicated. Every mine site has unique characteristics that will require a different range of low-carbon vehicle technologies. There is currently huge pressure on OEMs to meet this demand while also developing and supporting their diesel vehicle portfolios.
Who is going to pay for this shift – mining customers, end consumers? It is unclear and there is some reluctance from mining companies at the moment, because they’re afraid of volatility of demand.
The role of the consumer
While the consumer may still feel distanced from the mining process, that is starting to change.
The IBM Institute for Business Value published a 2020 report which found that the COVID-19 pandemic has overwhelmingly changed the sustainability mindset of consumers.
“Nearly eight in 10 respondents [to the survey] indicate sustainability is important for them. And for those who say it is very/extremely important, over 70% would pay a premium of 35%, on average, for brands that are sustainable and environmentally responsible,” it stated.
“For many people, COVID really brought home the need for more sustainable products, employers and investment,” Van Ballaert said. “If this shift holds up when we get back to normal, will people then make more conscious purchasing decisions and want to understand where the metals and minerals in longer-lasting goods like fridges, phones and cars come from?
“This is already happening around fast-moving goods in industries like food and fashion. Will we get to the point where every item has its carbon footprint advertised?”
“I think people would be willing to pay a premium for products containing responsibly-sourced metals,” I said. “The mining industry just needs to figure out how to speak to those people, to make that connection and close the gap between metals and consumers.”
Hannan added: “What I liked about what you’re saying, Sonia, is that it makes us think about the future. What could mining look like going forward if leaders were willing to sit down with those from other sectors and understand how they’re handling decarbonisation?
“I feel that the mining sector has a tendency to be more internal looking. But 80% of problems that companies face are the same across most B2B sectors. There’s so many lessons learnt from construction, marine, aviation… that mining companies can benefit from.”
Data makes for better decisions
“Sonia, you touched upon a good point earlier around giving people granular information to measure, not only decarbonisation, but also general optimisation efforts,” I said. “What role can digital technology play?”
“The key lies in making data around CO2 emissions available in real time,” she said. “We need to get away from just reporting. Reporting is good, but it’s always after something has happened.
“Having emissions data available in real time and making it understandable and actionable will be key in allowing people on the ground to make decisions around decarbonisation and intervene in a timely manner. Digital tools will enable that.
“The other piece is AI, we do need algorithms to suggest better regimes, but people need to trust what the machine is telling them. With a lot of experiments around AI and machine learning it doesn’t work because people on the ground don’t trust it.
“We need to open the black box that is AI and involve the user so that data becomes explainable. That’s something we’re working on through Oren.
“If you want to tackle emissions management at this scale and depth it takes a digital transformation.”
Many people struggle with the amount of data that they get from equipment and it’s easy to get bogged down in what to do with it all.
Hannan explained: “You need to be really clear what your KPIs are and understand exactly what information you need to make better business decisions based around them. People tend to go down rabbit holes of what they could potentially do with all the data but, if it’s not driving the right business behaviours and decisions, then there’s no point in doing it.
“It also needs to be embedded within the overarching strategy. Data can help you understand quite quickly what needs to be done, but you need to be really clear around what you want it to do.”
“It sounds like maybe we need to do a bit more work around planning and strategy,” I said. “It’s easy to miss the fact that incremental improvements in certain areas can quickly add up. We don’t need to do everything at once.”
“Yes, but it’s not like there hasn’t been research about what decarbonisation in mining requires,” countered Hannan. “The three biggest levers quantitatively are: energy efficiency, which has cost benefits for the mine anyway; switching to renewables, which often carries a cost benefit; and addressing fugitive methane.
“If you do those three things then the footprint of mining goes down dramatically. The question is: are miners doing exactly what they need to do with those three things in mind?”
Evolving how we view risk
As always, the conversation comes back around to risk. But let’s be clear, it’s not risky to take technologies that have been proven 100 times over in other industries and apply them to mining.
There are other applications, marine for instance, which are just as complex as mining. And most technology providers don’t just serve the mining industry. Chances are they will have gone through the adaptation process at least once.
If mining companies try to develop all the solutions they need in house rather than partnering with others, both from inside and outside the industry, it’s probably not going to generate a sustainable outcome.
Can that really be called ‘optimisation’?
“It comes back to how we think about mining,” said Van Ballaert. “Mining is not a destination; it produces a raw material. If there’s no understanding of the collaborative value chain that eventually leads to the consumer, then companies can continue to think insularly.
“Maybe mining will change its mindset once we get truly into circularity? Then it won’t be about the commodity trade anymore, it will be about the business models that recycle the commodity and keep it in circulation.”
“Mining as part of a circular ecosystem; many mining companies will see that as a threat,” I said.
“For a long time, in the energy sector, there were people who saw the energy transition as a challenge,” said Hannan. “But now there are others who see it as a huge opportunity to be a part of that change and to drive it forward; who have used it to imagine a different type of company. Mining companies need to think through that too.”
There are some such partnerships developing. For instance, in June, Rio Tinto and Schneider Electric announced a collaboration to develop a circular and sustainable market ecosystem for both companies and their customers.
Going forward, Schneider will use responsibly sourced materials produced by Rio, and Rio will utilise energy and industrial services from Schneider. The companies are working together to further decarbonisation in the mining supply chain.
“I wonder if the step change will come when an independent player steps in to create a consortium that will link the whole value chain together and tackle decarbonisation?” said Hannan. “That’s what needs to happen, particularly around steel. That’s where the majority of mining companies’ scope 3 emissions come from.”
Van Ballaert added: “I think the mindset change will vary by commodity – there’s a whole logic around lithium that’s different to, say, iron ore. We could see different business or circularity models evolving around specific commodities.
“There will be a question about how miners deal with that, whether they’re a single commodity miner or have a large portfolio of assets…
“There’s a lot of change ahead and I don’t know if the industry fully realises it, with the digital revolution, CO2 regulations and constraints, circular value chains, different demands on different commodities…
“In 10 years, this industry could look completely different.”