BHP BILLITON’s Hay Point terminal in Queensland, one of four major expansion projects by BHP and Japan’s Mitsubishi that will add up to 15m tonnes to the seaborne coking coal market each year.

BHP BILLITON’s Hay Point terminal in Queensland, one of four major expansion projects by BHP and Japan’s Mitsubishi that will add up to 15m tonnes to the seaborne coking coal market each year.

How BHP is Crushing the Met Coal Market

Issue 85, May 2014

BHP Billiton is crushing the coking coal market, turning up volume even as prices fall, forcing smaller and higher cost miners to idle their operations.

Prices for coking or metallurgical coal, used for steelmaking, have plunged from over $300 per tonne in 2011 to around $110 currently. As prices have fallen, producers have defended earnings by increasing volume, individually hoping to ride-out the cycle but collectively prolonging its downturn.

That phase of the cycle appears to have entered its end-game, with mine closures gathering pace in recent weeks. On Friday, Brazil’s Vale announced the closure of its Integra operations in New South Wales, pulling 3.3m tonnes of coking coal off the seaborne market each year and adding to 13m tonnes of annual supply idled in April.

Alabama’s Walter Energy idled its Canadian operations last month, whilst James River entered bankruptcy. Rio Tinto has meanwhile butchered headcount at its Hail Creek mine in Queensland, whilst Glencore suspended its Ravensworth mine in March.

In isolation, the closures have the potential to sway the seaborne market, estimated at 300m tonnes per annum. BHP Billiton however, the world’s largest producer under a joint-venture with Japan’s Mitsubishi, is aggressively running counter to peers, upping its full-year guidance to 44m tonnes last month, 6 per cent above prior guidance and 30 per cent above output in 2012.

That figure is set to rise further to 59m tonnes, as expansion approvals undertaken in 2011 begin to hit the market. BHP opened its 30-year Daunia mine in Queensland last year and is expecting first coal from its 60-year Caval Ridge complex in 2014. It has also expanded its Broadmeadow mine and its Hay Point terminal, adding 15m tonnes to the market each year.

According to JPMorgan, BHP is marginal to lossmaking at current prices, as is Canada’s Teck, the world’s second largest exporter, which is scrambling to keep up with BHP by escalating production.

The strategy mirrors that of Rio Tinto’s iron operations in the Pilbara, which hit a record run-rate of 290m tonnes last week, with a capacity expansion to 360m tonnes already underway. “Regardless of what the price is,” Rio’s boss Sam Walsh said this week, “we will be the last one standing.”

“Regardless of what the price is, we will be the last one standing.”

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