Metals and mining companies will face varying impacts from the transition to a low-carbon economy, including the need to transform production processes and to switch to greener energy sources and cleaner feedstock, Fitch Ratings says in a sector-specific Climate Vulnerability Scores (Climate.VS) report. Climate vulnerability scores vary depending on companies’ demand and supply outlooks, role in the energy transition, carbon intensity of value chains, access to technologies, and substitution risks.
Nickel and copper have the brightest demand outlooks in the mining sector due to their use in green economy infrastructure, such as solar panels, wind turbines, electric vehicles, and grids, although producers will need to reduce the carbon footprint of their operations. Aluminum is also required for the green transition, although Fitch expects it to have moderate demand growth, with producers facing pressure from rising carbon costs. Fitch expects demand for zinc to be supported by its wide use in construction and steel galvanization (the latter used for wind turbines).
Fitch does not expect the energy transition to materially change demand for gold as it is viewed as a financial asset and used in jewelry. Mining of non-ferrous metals is responsible for almost 1% of global greenhouse gas emissions, much lower than steelmaking (7%).
The key challenge for steelmakers’ decarbonization will relate to the technological shift, with multiple options being developed. At the same time, steel is an essential material for building the green economy. The report expects that steelmakers will transition to the electric arc furnace route, which does not require coking coal but will continue to use iron ore. Producers relying on the blast furnace-basic oxygen furnace route will be subject to the highest risks. Thermal coal will be gradually phased out and faces a long-term existential threat.
The low-carbon transition will cause companies in the lodging and gaming sector to incur additional costs. In comparison to more carbon intensive industries, the sector – which accounts for around 1% of global emissions – does not face a substantial threat to its business model, but pressure to tackle rising emissions and energy use will lead to increasing costs and disruption.
Climate transition risks will arise as a result of policies targeting emissions reductions, and energy and water efficiency, as well as growing investor and consumer pressure. Both the stringency of policy and compliance costs are likely to increase, posing moderate-to-low risks to the profitability and long-term creditworthiness for companies in the sector.
The main differentiating factor influencing the distribution of scores across the lodging and gaming sub-sectors is the operating model. Hotels or gaming/casino companies with a preponderance of owned and leased portfolios (“asset heavy”) will generally see higher levels of vulnerability in the coming years. This is given the greater cost burdens entailed by upgrades – such as the installation of renewable energy capacity – as well as retrofits and other changes to operations amid the tightening of emissions and energy efficiency standards.
By contrast, asset-light operators – those that do not directly own or lease premises – are expected to face more modest cost pressures, notably relating to adaptations of their food and other service offerings and rising carbon costs within their upstream supply chain. Similarly, online gaming will see very limited vulnerability to climate transition trends through 2050 given the sub-sector’s low emission profile and positive underlying demand drivers.
Finch also recently reported that governance is the factor that impacts corporate credit ratings the most when it comes to ESG situations. At the end of 2021, nearly 12% of corporate issuers had at least one elevated score in terms of how governance was handled, indicating that concerns in that area of ESG can have an impact on credit ratings. As a result, governance risks should be managed by all corporate issuers to maintain credit quality of a business.