More 'tough love' in store for BHP coal
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.
Frequently Asked Questions about this Article…
BHP has signalled more 'tough love' for its coal division: it's putting underperforming mines on the block, simplifying the portfolio, renegotiating or terminating supplier contracts and cutting capital spending. Management says assets must earn their right to remain in the portfolio as the division has seen a sustained profit slide and is only barely breaking even.
Reports in the article name the Gregory coking coal mine in Queensland as believed to be on the block (it was partly shut last year) and note the nearby Norwich Park mine has been shut. Separately, BHP is negotiating with the Navajo Nation over the sale of a New Mexico mine that could raise an estimated US$85 million.
BHP has forced suppliers to renegotiate contracts, terminated some contracts, pushed down prices for spare parts and consumables and cut maintenance costs. Those actions delivered around US$800 million of savings in the first half alone, according to the company.
BHP plans to halve capital outlays to US$2 billion over the next two years as major projects are completed and spending is focused on boosting cash flow and de‑bottlenecking shipments.
BHP is spending to 'de‑bottleneck' shipments so its Queensland mines can export more. The company aims to raise capacity to about 75 million tonnes annually over the next few years from an estimated 49 million tonnes at present.
BHP says China will remain a significant importer of coking coal but growth will slow as a rising share of steel is produced in electric arc furnaces (which use scrap steel rather than coal and iron ore). As China’s demand growth eases, markets like India and Turkey will become increasingly important.
BHP told analysts that, in the absence of a major supply disruption, near‑term metallurgical (coking) coal prices are likely to be range‑bound. The article notes the export market price for coking coal is holding at about US$150 a tonne.
The article highlights that BHP is prioritising cash flow and value: underperforming coal assets may be sold, costs are being aggressively cut and capital spending is being reduced. For investors, that suggests BHP is tightening its coal exposure in response to weak market fundamentals and seeking to protect margins, but the coal division faces a tough market with limited upside until demand or prices improve.
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