“The Western world is trying to address inflation by increasing interest rates. It is of course important for the health of the Western world’s economy,” said Jakob Stausholm, CEO of Rio Tinto, in an interview with Nikkei Asia. “But what is even more important is the health of the Chinese economy, which has actually been growing quite significantly during Covid.”
China is the world’s largest consumer of many minerals and metals. For Rio Tinto, the country is a big buyer of its core assets such as iron ore and accounts for roughly 56% of total sales, according to QUICK-FactSet.
While countries in the west are gradually returning to normal, some cities in China are still locked down as the country shows no signs of easing its zero-Covid policy.
“What’s critical for the short-term demand is going to be how quickly the stimulation of the Chinese economy will kick in,” said Stausholm, adding that the country usually focuses on infrastructure and property when it enacts stimulus measures.
A rise in infrastructure and property demand usually contributes to a rise in demand for steel and electric wires, which require base minerals and metals such as iron ore and copper.
“I’m still cautiously optimistic that the demand for our products will be good,” said Stausholm.
Chinese president Xi Jinping is set to secure his third term in office later this month and is expected to continue managing the economy. Stausholm said China is in the process of raising living standards across the entire country.
“There are still a billion people who would love to have that lifestyle stand up. So I really hope China and the government of China will be successful with that,” he said. “We are selling a lot into China. We are very dependent on the success of China.”
In the face of inflation and rising demand for minerals needed for decarbonisation, concerns are growing globally about so-called greenflation, where the global decarbonisation push leads to hikes in commodity prices.
Stausholm says he has few worries. He explained that even though the price of “green” materials is more expensive than ordinary metals when it comes to the final consumer price, there is only “a 3% to 5%” increase as there are many different elements.
“When you look at the final consumer price, it is only a couple of per cent. The world can afford it,” said Stausholm. “Wherever you have a problem is how we translate the cost – the extra cost – from the producer into the consumer goods.”
The demand for some commodities is expected to surge and suppliers are figuring out how to secure a stable supply. “One of the biggest challenges is lithium,” Stausholm said. “The problem is the demand in 2030 is probably going to be tenfold the demand in 2020, and that means a number of new mines need to be opened.”
Rio Tinto expects to deliver the first lithium supply from a reserve in Argentina in 2024. Currently, the company extracts a limited amount of lithium from a borate mine in the US state of California. The company has another lithium asset in Serbia. Earlier this year, however, Serbia has withdrawn exploration licenses under pressure from local protest groups.
“We have been struggling on agreeing to progress with the government. So I hope we will find that solution for the benefit of the nation Serbia, and we think we can really help develop that,” he said.
The ongoing energy crisis is a fresh rationale for countries to go forward with decarbonisation. In the US, president Joe Biden in August signed into law the Inflation Reduction Act, which fuels huge investment in the energy transition and decarbonisation.
“You see companies becoming more and more serious about addressing decarbonisation,” said Stausholm. With the prices of fossil fuels soaring, “the economics of investing in renewable energy has become better”.
Rio Tinto last year announced that it will invest US$7.5 billion between 2022 and 2030 to reduce carbon emissions by 50% 2030 – a reduction three times greater than its previous target.
Stausholm told Nikkei the company allocates US$7 billion to US$10 billion yearly in total capital spending. The ratio of decarbonisation investment in capital spending “certainly will go up over the next years and this decade”, he said. “Quickly, we will come into spending a couple of billion dollars a year on decarbonisation, so it’s a significant part of our investments.”
“We have invested very little so far and it’s simply because when we decided the strategy last year, we first of all built a team, built the competencies. We have started defining the projects,” said Stausholm.
“But it’s very clear: Not only do we have a target for 2030 but we also have a minus 15% target for carbon emissions in 2025. So we are rushing and progressing the projects as fast as we can.”