BHP cuts coal output guidance on royalties hike

Australian resources firm BHP has warned that the Queensland government's coal royalty rate increase threatens investment and jobs, contributing to its decision to set an unambitious metallurgical coal production target for the 2022-23 financial year that started on 1 July.

BHP has set production guidance for its BHP Mitsubishi Alliance (BMA) coking coal joint venture at 58mn-64mn t in 2022-23, having produced 58.1mn t in 2021-22, which was down from 63.92mn t a year earlier. The 2022-23 guidance is below the initial BMA guidance of 60mn-68mn t set for 2021-22, which was reduced to 58mn-61mn t in December, after widespread flooding and higher than expected Covid-19 workforce absenteeism.

The unambitious 2022-23 target reflects weaker pricing for metallurgical coal over the past two months and the possibility of more flooding, with another La Nina watch issued by the Australian Bureau of Meteorology for the year ahead. But it is also a signal to the Queensland government that the increase in royalty rates are bad for coal production in the state.

"BHP is assessing the impacts on BMA economic reserves and mine lives as a result of the increase in coal royalties by the Queensland government," BHP chief executive Mike Henry warned in the firm's quarterly production results released today.

The firm estimates that the change in royalty rates, which are effective from 1 July, will increase its pre-tax effective royalty rate by 7 percentage points to 19pc at a current spot price of $243.50/t fob Australia for premium low-volatile hard coking coal. BMA is already battling inflationary costs, with BHP expecting them to be marginally above guidance for 2021-22. BHP revised up its 2021-22 production costs from $80-90/t to $85-94/t in December, up from $64.41/t achieved in 2020-21.

BHP received an average price of $437.60/t for hard coking coal and $382.56/t for weak coking coal in January-June, up from $278.60/t and $218.65/t, respectively, in July-December and from $118.54/t and $104.40/t in January-June last year. It defines hard coking coal as those with a coke strength after reaction (CSR) of 35 and above, with weak coking coal categorised as those with a CSR of below 35.

Argus last assessed the premium hard low-volatile coking coal price at $235.65/t fob Australia on 18 July, down from $664/t on 15 March. Lower-grade metallurgical coal prices have also decreased significantly over April-July.

Henry did not comment on the prospect of Beijing removing the ban on Australian coal imports, which could boost Australian metallurgical coal sale prices. He may provide additional comments when the firm releases its full year financial results on 16 August.

BHP completed the sale of its 80pc interest in BHP Mitsui Coal (BMC) to Australian producer Stanmore on 3 May, cutting attributable production for the April-June quarter.

By Jo Clarke

Australian metallurgical coal prices $/t