There are two words that BHP-Billiton really seems to choke on these days: thermal coal. In a 47-page briefing released just over two weeks ago on the company’s global coal interests, thermal coal (or ‘energy coal’ as the company quaintly prefers to describe it) barely rates a mention.
It’s not that BHP Billiton doesn’t mine it: it does and in a huge way. The company has major interests in seven thermal coal mines – two in New Mexico US, one in the Hunter Valley in New South Wales Australia, three in South Africa and one in Colombia. Between them the mines produced 77 million tonnes in 2012.  All up, BHP Billiton’s total direct share of the coal produced is a little over 63 million tonnes for 2012, making it one of the world’s largest exporters of thermal coal.
Nor is it that the company is short on thermal coal resources: it has measured resources alone, based on mid-2012 data, of the best part of seven billion tonnes of it. With each billion tonnes of coal generating around 2.7 billion tonnes of carbon dioxide, BHP Billiton has a coal gun aimed firmly at the planet’s head.
BHP Billiton’s wariness about talking about thermal coal is precisely because the financial prospects for thermal coal are now so bleak that no matter how much the company talks about how much of it the company mines and owns is not going to help revive the company’s sagging share price one little bit.
Instead of talking about power station coal, BHP Billiton’s newly installed coal head, Dean Dalla Valle, was keen to show off to analysts a couple of half-completed metallurgical coal mines in Queensland and the partly-completed upgrade of the Hay Point Coal Terminal.  Clearly, BHP Billiton thinks that if it has to talk about coal with analysts, it better focus on metallurgical coal, of which it is the world’s largest exporter, because thermal coal just isn’t going to cut it with those wanting to make – rather than lose – serious money.
BHP Billiton’s attempt to put some distance between itself and the ailing thermal coal market is not recent. In a November 2012 interview with the Australian Financial Review, BHP Billiton’s then head of the company’s iron ore and coal division, Marcus Randolph, described the future of thermal coal as  ‘very clouded’. “In a carbon constrained world where energy coal is the biggest contributor to a carbon problem, how do you think this is going to evolve over a 30- to 40-year time horizon? You’d have to look at that and say on balance, I suspect, the usage of thermal coal is going to decline. And frankly it should,” he said.
Randolph’s statement was designed to draw a line between the increasingly grim prospects of thermal coal and the company’s dominant interest in the comparatively better performing metallurgical coal projects. (Randolph, who was reported to be losing contender for the chief executive job at BHP Billiton, was replaced on the company’s Group Management Committee by Dalla Valle two months ago. According to BHP Billiton, Randolph is on sick leave until the middle of the year.)
Faced with declining prices in both thermal and metallurgical coal, the company has opted to press ahead spending hundreds of millions more to complete a handful of half-completed new mines and infrastructure projects initiated in the heady days of the recent coal boom.  While the briefing notes put a brave face on the company’s big-ticket expansions, the underlying sense is that its coal executives have their fingers crossed behind their backs hoping other producers projects go bust before theirs do.
As one of the world’s largest coal exporters BHP Billiton’s assessment of the global market is significant. While a global exporter, BHP Billiton’s operating mines are concentrated in just four countries: Australia, Colombia, South Africa and the United States.
‘Don’t talk about the war’: thermal coal
Perhaps the most telling point of the company’s presentations to the analysts is what is not in them. The absence of any detail of the future of the thermal coal market implies that BHP Billion has a pretty pessimistic view of the next decade. Given that almost two-thirds of the total volume of coal BHP Billiton sells is thermal coal, the company’s silence on the thermal coal outlook is bad news for investors and good news for anti-coal activists. An oversupplied market, falling returns and antsy investors is driving the company to stall the development of new exploration projects and most new mines.
In his presentation giving an overview of  BHP Billiton’s coal division, Dalla Valle mentioned only three thermal coal projects: the expansion of the Cerrejon coal mine in Colombia, the expansion of the Newcastle export terminal and plans to offload the Navajo mine in New Mexico to the Navajo Nation.
The ‘P40’ expansion of the Cerrejon mine in Colombia – at an estimated cost of US$437 million to BHP Billiton – and the stage 3 expansion of the Newcastle coal terminal – are both so advanced (65% and 71% completed respectively) that the company and its joint venture partners can’t pull back. With hundreds of millions sunk into the projects so far, the company would rather press on into coal’s bleak winter than turn back and admit defeat.
Back in August 2011 BHP Billiton decided to spend US$367 million as its share of expanding the coal export terminal in Newcastle from 53 million tonnes per annum (mtpa) to 66mtpa. BHP Billiton is a 35.5% shareholder in Newcastle Coal Infrastructure Group, which owns and operates the terminal. (Two other export terminals are also located in Newcastle but owned and operated by another company, Port Waratah Coal Services, which BHP Billiton is a very minor shareholder.) At the time of the go-ahead for the expansion project, BHP Billiton stated that its share of the expansion – a further 4.6mtpa on top of its existing 14.6 mtpa allocation – was designed to support the expansion of the existing Mt Arthur Mine and the possible development of the controversial Caroona coal project.
However, while the Mt Arthur mine has expanded in the last few years, the presentations for the recent analyst’s tour made no direct mention of the Caroona coal project, which has been strongly opposed by local farmers. Instead Dalla Valle pledged to “substantially reduce development expenditure with no new major projects planned” and boasted of “decisive” action to “reduce business development and exploration expenditure”.
What BHP Billiton didn’t mention in its briefing notes is that an extra 8 million tonnes a year of low-cost coal from the Cerrejon mine in Colombia is only likely to further depress global thermal coal prices. The mine and associated port expansion are due to be completed later this year and ramp up to full production by 2015.
The only other project Dalla Valle mentioned was its 7 million tonne a year Navajo mine in New Mexico which BHP Billiton has entered into a non-binding memorandum of understanding to sell to the Navajo Nation. The mine is the sole coal supplier, until the contract expires in 2016, for the ailing Four Corners Steam Plant owned by Arizona Public Service Company. BHP Billiton’s plan to sell the mine to the Navajo Nation, reportedly  for approximately US$85 million, has rekindled controversy  over the environmental impacts of both the mine and power station. Offloading polluting assets is not something new to BHP Billiton: back in 2002 it bailed out of its polluting Ok Tedi copper mine in Papua New Guinea to leave local landowners and the government to sort out the mess.
So where is the steel industry cavalry?
When the thermal coal price started to fade in mid-2008, Big Coal’s loyalists took comfort in the comparatively rosy prospects of metallurgical coal. For years the coal industry’s hype – that there was no alternative to using coal for making steel and that per capita steel consumption would increase at astounding rates in countries such as China and India – echoed around the media echo chamber.
When it comes to the global seaborne metallurgical coal trade, BHP Billiton is king. The company exports twice the volume of Teck and is edging up towards triple the production of the US company Alpha Natural Resources. So it is notable that in their presentations to investors even BHP Billiton’s executives are now conceding that the global metallurgical coal export market is nowhere near as rosy as a few years ago.
The new charts from the company plotting projected demand for met coal still point upwards, but at a far, far slower rate than just a year or two ago. Where demand for met coal grew at over 6% a year in the decade to 2010, BHP Billiton is now estimating that it may grow by just 1.5% a year in the twenty years to 2030, with nearly all the growth to 2025. Europe and Japan, the company glumly notes, are at best likely to have “limited growth”. Where China was once the great hope for the met coal exporters, now BHP Billiton notes that “much of China’s future demand growth will be met by domestic coals.”
BHP Billiton also notes that alternatives to conventional coal-intensive steel production are flattening demand. The increased usage of scrap metal in furnaces, the company warns, will result in lower growth in demand for pig iron while greater production from electric arc furnaces – which use no or comparatively little coking coal – are expected to “contribute a significant share of total Chinese steel production by 2030”. Instead, the company is pinning its hopes on most of the growth originating from India, and to a lesser extent countries in South East Asia and Turkey. But even then, the company cautions that the “India steel outlook is less certain as steel production growth has been slower than expected.”
At best, BHP Billiton concludes that slower demand growth and “range bound pricing” in the short term “could lead to project delays”. While the company includes a chart on its projection of global met coal demand to 2030 and charts the recent collapse in met coal prices, there is no graph on what it expects future prices to do. Why not? The absence of any price projections implies the outlook is not at all pretty for met coal exporters.
In its presentation the most significant of the met coal projects the company mentions are the Caval Ridge project in the Bowen Basin in Queensland, which is 63% complete, and the expansion of the Hay Point coal terminal, which is 61% complete. The first stage of Caval Ridge project is scheduled to produce 5.5 million tonnes per annum (mtpa) with commissioning due early next year. However, the plant at the site is being built to cater for an expansion of up to 10mtpa and the company refers to the project as having sufficient resource to operate for 60 years. The expansion of the Hay Point Coal Terminal this will add 11 mtpa capacity to the terminal and is designed to try and cyclone proof the terminal by increasing its height above the level reached by Cyclone Yasi in early 2011.
Overall, BHP Billiton’s strategy seems clear – press ahead and complete advanced projects, cut costs on existing operations, scrap major new projects and hope that smaller rivals are the ones forced to shut mines first. And put a very, very brave smiley face on for investment analysts.
But for Big Coal’s boosters, there is a final sobering point. In presentations over recent years, BHP Billiton has included charts showing a long list of potential thermal and met coal projects scattered around the world – particularly in Australia, South Africa and Indonesia. This time there is no mention of possible future projects. Clearly investors don’t want to hear about more big-budget projects as the market for both thermal and metallurgical coal sours. For anti-coal activists, the downwards spiral of the international coal prices means that there are likely to be less and less new coal mines wending their way through the new project ‘pipeline’ as nervous executives, investors and banks grow ever more wary of coal projects and thermal coal projects in particular.
Bob Burton is a Contributing Editor to the CoalSwarm wiki and co-author – with Guy Pearse and David McKnight – of the forthcoming book Big Coal: Australia’s dirtiest habit (New South Books, August 2013).