BHP cuts Australian coking coal investment

Australian resources firm BHP has cut all investment in its Queensland coking coal business, in response to the state government's coal royalty rate increase and China's continuing ban on imports of Australian coal.

"We are not going to deploy any major capital into the Queensland coal business following the change in the Queensland royalties," BHP chief executive Mike Henry told analysts as he announced an increase in annual group profit for continuing operations to $22.4bn from $13.7bn a year earlier.

This is in contrast to the firm's move to increase iron ore production to over 300mn t and examine options to go to 330mn t/yr in Western Australia, sending a clear message that Australian states with more stable royalty regimes get rewarded with more investment. The Queensland government introduced new upper tiers to its coal royalty regime from higher prices from 1 July, including a top rate of 40pc on the portion that is sold above A$300/t ($211/t).

Argus last assessed the premium hard low-volatile coking coal price at $244.65/t fob Australia on 15 August, down from $664/t on 15 March. Both hard mid-volatile coking coal and pulverised coal injection grade coal are also attracting this top 40pc royalty rate at current spot prices.

BHP set an [unambitious production guidance for its BHP Mitsubishi Alliance (BMA) joint venture](BMA) of 58mn-64mn t in 2022-23. It declined to give any guidance on medium-term production or costs on 16 August, blaming the policies of Queensland and Beijing. It also singled out the royalty hike as leading it to withdraw its sustaining capital expenditure guidance for its coking coal operations.

BHP expects production costs to rise to $90-100/t in the year to 30 June 2023 from $89.64/t in 2021-22 and $82.64/t in 2020-21. It is starting to see some signs of inflation easing, particularly from lower diesel costs.

The decision not to invest in BMA came despite Henry insisting that the long-term demand for its high-grade coking coal remains robust, as the transition to the economic production of green steel using hydrogen instead of coking coal looks decades away. While BHP is investing in green steel technology it is also working with its customers to reduce emissions in the shorter term by moving to high-grade hard coking coal from lower grade metallurgical coal.

This drive towards higher grade coking coal informed BHP's sale of its 80pc interest in lower grade BHP Mitsui Coal to Australian producer Stanmore, Henry added.

BHP's 50pc stake in BMA contributed earnings before interest and tax (ebit) of $5.71bn in 2021-22 compared with a loss of $30mn in 2020-21, largely on higher received prices. Coal, including New South Wales Energy Coal, was the second-largest contributor to BHP's ebit in 2021-22 behind iron ore but ahead of copper and compared with a loss from its unallocated operations that include the growth assets of nickel and potash.

By Jo Clarke

Australian metallurgical coal prices ($/t)