BHP's clever thermal coal strategy

BHP seems to be going for quality over in thermal coal production from its Mt Arthur thermal coal mine in New South Wales – a radical departure from its previous approach.
BHP's clever thermal coal strategy BHP's clever thermal coal strategy BHP's clever thermal coal strategy BHP's clever thermal coal strategy BHP's clever thermal coal strategy

The company previously pushed out higher and higher production figures to achieve economies of scale regardless of coal prices.


Now it prepared to turn out fewer tonnes but get higher returns through selectively mining the higher calorific coal with fewer impurities favoured by Japanese and Korean customers. 


It has changed its mining approach to produce more coal with 6000 kilocalories of energy per kilogram. Its previous focus was on producing coal with 5500 kilocalories of energy per kilogram, which Chinese customers wanted.


In its latest quarterly production report, BHP said its New South Wales Energy Coal production decreased 2% as record stripping performance was offset by higher strip ratios and lower wash plant yields as it optimised its mine plan to focus on higher quality products given widening quality differentials.


In the 2020 financial year, the changed product mix to focus on higher quality products is expected to contribute to a decrease in production to between 15 million tonnes per annum and 17Mtpa. This compares with 27Mt in FY19.


Regular readers of this column might remember Hogsback being critical of BHP management for telegraphing that it would be getting out of thermal coal. This was because it appeared that Australia's largest mining corporation was buckling under pressure from activist shareholders.


Mt Arthur is a tier one asset for BHP, a major export earner for NSW, and a major employer in the Hunter Valley. Any talk of downgrading such an asset is concerning.


However, Hogsback now believes BHP's Mt Arthur plans are more nuanced and part of an intelligent strategy to deal with both the growing climate change issue and the precarious state of Australia's relationship with China given the US - China trade war.  


There are media reports of about 15Mt of Australian thermal coal worth more than $1 billion waiting to clear customs in China.


By supplying cleaner coal to Japan and Korea instead, the company could expect to get about US$99 per tonne instead of the $77.90 it currently gets with the lower grade coal.


While this will come at a higher cost because of coal washery expenses and lower economies of scale, the returns to BHP from higher value coal exports to longstanding trading partners as well as the benefit to the environment of supplying cleaner coal makes the company's thermal coal strategy more attractive to Hogsback.