June 10, 2019
Hint: not while it’s making so much money.
There was media coverage recently that the world’s biggest listed mining company, Australia’s BHP, was getting out of thermal coal. So what did the company actually say, and what did they mean? Perhaps not what you think.
BHP is one of the world’s largest coal producers – but most of it is metallurgical or coking coal for steelmaking. It is the world’s largest supplier of coking coal in international markets.
While coking coal is an essential component in the making of iron and steel, and cannot be replaced for decades to come, thermal coal is mainly used for power generation and is facing price competition from renewables, and public pressures over carbon emissions causing global warming.
BHP owns two major thermal coal mines – all of the Mount Arthur Coal mine in the Hunter Valley, producing around 20 million tonnes per year – and one third of the Cerrejon project in Colombia that produces 30 million tonnes per year. These are large coal mines in world rankings.
In a presentation to investors on 22 May, BHP said: “energy coal assets are challenged”, that the company has “no appetite for growth in energy coal regardless of asset attractiveness” and that energy coal globally would be phased out “potentially sooner than expected”.
BHP was also at pains to point out that thermal coal was just 3% of its assets, unlike the broader coal business which is one of the major pillars of the company.
On the other hand, the company is making loads of money out of its A$2.5 billion of thermal coal assets. In its half year report to December 2018 the company reported over A$600m (A$1.2 billion on an annualised basis) in cash flow after deducting operating costs. The cash margin ranges from 30 cents to 50 cents in the dollar. These are very profitable assets. The company is not offloading these assets while they are so profitable.
So what BHP is doing is not much different to what Glencore was doing when it told markets that it was capping its thermal coal production (at something like 140 million tonnes per year!) It is saying something like “we think thermal coal will have problems in the future, but right now we are making loads of money in thermal coal and will hang on to it for a while yet.”
Globally, thermal coal is at or close to its peak. Production has grown slightly in the last two years. It is in strong decline in Europe and North America, and its use for power generation in Australia is also declining. But in various south east Asian markets it is still growing, and Australia is highly competitive relative to many other producers, so Australian production for export is still forecast to grow – though for how much longer is very uncertain. In March, the Australian government forecaster had thermal coal exports growing from 209 million tonnes in 2018-19 to 225mt in 2022-23 or 1.7% per year. Nothing much, but not shrinking (though export revenues are indeed forecast to shrink – from A$26.7 billion to A$23b over the same period.)
There are some who wouldn’t be sad to see the back of BHP in Australian coal – with its high rate of contractors, casualisation and wage-cutting it is not a good employer or a trustworthy company to deal with. But even in thermal coal, the company will be around for quite a while yet.
National Research Director