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BHP Billiton’s coal sector faces uncertainty, rough times ahead

For mega mining firm BHP Billiton, the battle has only yet to begin. The Australian company is facing the fight of its life as weak prices for coal con...

|Jul 29|magazine10 min read

For mega mining firm BHP Billiton, the battle has only yet to begin.

The Australian company is facing the fight of its life as weak prices for coal continue to persist, languishing around $60 a ton, and forcing an uncertain future for BHP. According to newly elected coal chief, Mike Henry, a recovery in coking coal prices isn’t going to happen any time soon.

"When I started in the business at the beginning of the year, I was not expecting prices would come off by 20 percent–25 percent," he said. "I'm not really expecting you are going to see a sharp recovery any time soon, given the amount of oversupply you see in the market and the fact that seaborne import demand into China has tapered off."

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Henry added that uncertainty over how China is implementing new regulations to test for fluorine in coal, had further dented demand.

"One problem is that they (China) don't use the same testing standards that we use and the results on the Chinese side can be quite different from the results here--that creates uncertainty."

Despite the price outlook, however, Henry said he intends to boost production from the company’s Queensland coal mines through increased productivity.

BHP Billiton’s Chief Commercial, Dean Dalla Valle, who recently switched positions with Mike Henry in January, believes BHP must continue to look for efficiencies and cuts in metallurgical and thermal coal.

"I think the industry has been a bit over rational, they have just assumed that the high-cost producers will exit," Dalla Valle said.

"But people have been driving productivity. I think customers value a diverse supply base and the supply has been sticky. Going broke is hard to do."

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However, increasingly influential fossil fuels divestment campaigns along with anti-coal lobbying have caused pressure on the company. According to Dalla Valle, the attempt to kill off coal is misguided.

"Just to suddenly say that the world is going to stop doing this [coal], without taking into account the need to supply energy that is cost-effective for the developing world is ultimately doomed in failure. Because if you just stop [mining] in one place, someone else will mine it – coal is abundant."

"You have got two billion people coming along who are going to want the same prosperity we had, which is based on cheap energy. Coal is going to be a big part of the solution. To say to one group, or one country – to impose a mandate and force them to a destabilising route for energy … it just fundamentally doesn't stack up."

Tough times ahead

BHP announced yesterday it is cutting 37 percent of jobs at its Melbourne headquarters, downsizing from 480 employees to as little as 300. The sweep restructure is part of chief executive Andrew Mackenzie’s mission to simplify the miner and reshape it to run like an advanced manufacturing business, according to the Financial Review.

Under the rules of the 2001 merger with BHP and Billiton, the company is required to keep its headquarters in Melbourne, and the CEO and CFO must spend the majority of their time there.

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