More 'tough love' in store for BHP coal

BHP Billiton has flagged its coal division is in for more "tough love" as it puts underperforming mines on the block and winds back capital spending against the backdrop of a tough global market which is not expected to turn up any time soon.

BHP has forced suppliers to renegotiate contracts following a collapse in earnings of the division, which is barely breaking even following a sustained profit slide over the past few years.

Believed to be on the block is the Gregory coking coal mine in Queensland, which was partly shut down last year due to low coal prices. It has also shut the Norwich Park mine nearby as it moves to "simplify" its portfolio.

BHP is also negotiating with the Navajo Nation over the sale of its mine in New Mexico, US, which, according to reports, could raise an estimated $US85 million.

"We will selectively pursue asset divestment opportunities with a firm focus on value," BHP told analysts on Wednesday. "Assets must earn their right to remain in the portfolio."

Contracts with contractors have been renegotiated and others have been terminated, while BHP has also forced down prices of spare parts and other consumables, along with maintenance services. In the first half alone, savings of $US800 million were achieved.

The focus for BHP now is to run its mines hard to boost cash flows, the company said, with capital outlays to be halved to $2 billion over the next two years as major projects are completed.

Part of the spending under way is to "de-bottleneck" shipments. BHP's Queensland mines are unable to boost exports at present, but capacity is to be raised to about 75 million tonnes annually over the next few years from an estimated 49 million tonnes at present.

China would remain a significant importer of coking coal, BHP said, although growth rates would slow since a rising portion of its steel would be produced by electric arc furnaces which use scrap steel, rather than steel produced from blast furnaces, which use coal and iron ore.

Demand from the likes of India and Turkey would become increasingly important as China's demand growth eased.

The warning from BHP comes amid broad-based cost cutting across the coal industry and caution over the outlook for prices and underlying demand volumes.

China's compound annual average steel output will expand by 2.7 per cent between 2010 and 2030, with pig iron output to rise just 1.1 per cent annually, BHP said, while for the rest of the world steel output would rise an annual average of 3.2 per cent, it said.

"In the absence of a major supply disruption, near-term metallurgical coal prices will be range bound," the company told analysts.

The price for coking coal is presently holding at about $US150 a tonne in export markets.

Separately, analysts warned that a large part of the reason China is cutting coal imports is due to the rising number of loss-making mines, with little upside expected any time soon.