Commentary: Coal down but not out

The following is an edited excerpt of a speech about the global outlook for coal by Dean Dalla Valle, president of BHP Billiton Coal, at the CEDA Energy and Resources series in Brisbane, Australia, where BHP has consolidated its metallurgical and thermal coal offices.

Most of BHP Billiton’s commodities have been subject to some decline in prices over the past 18 months, and coal has been hit by this fall in prices too.

On the metallurgical coal front, since 2009 prices have fallen from more than US$300 a tonne to around US$105 per tonne. In part, prices have been impacted by an increased supply of coal from the U.S., China, Canada, Russia and Australia.

But these recent price drops should be viewed in perspective.

I started in mining as a young apprentice at BHP Billiton’s Illawarra collieries, 37 years ago. During my career coking coal prices have been as low as US$55 per tonne in today’s dollars — now that’s a scary thought!

Energy coal has also felt the impact of lower prices. In 2011 we saw prices for energy coal of US$130 per tonne, and today it sits around US$75 per tonne.

While demand has expanded over this period, supply growth, particularly from a rapidly emerging Indonesian market, has outweighed demand, pushing down prices. This is a significant fall and has had a major impact on producers all around the world. In response companies have moved to rapidly decrease costs and maximize production to stay profitable.

What these recent price movements demonstrate is that coal prices are highly variable.

So how do we manage this variability? Over the past few decades the industry has invested in technological improvements that have made our mines far safer and certainly more efficient, while global production has increased.

Our mines have some of the biggest trucks in the world, hauling up to 360 tonnes at a time. To put this into perspective, this is equivalent to carrying 200 Toyota Corollas  in every load — or for an even stronger mental image, it’s the equivalent of a truck carrying two jumbo jets!

Our draglines can move up to 210 tonnes of overburden at a time and our conveyor belts shift our coal to wash plants and onto trains that eventually end up at our ports, where it is sent to our customers around the world.

But the industry cost base has increased. The activity in our sector, coinciding with intense investment periods for other commodities — including the gas sector here in Queensland — has led to higher costs right across our supply chain.

As I visit our operations, I remind people — particularly those who have only joined our industry in the last decade, and are feeling the pinch as prices contract — that this is nothing new.

But the good news is that we have the equipment, technology, infrastructure and expertise to operate safer and more efficiently than ever before. Over the past 18 months we have focused on our cost base throughout our operations, and there is still more we need to do as we look for ways to improve the productivity and competitiveness of our mines.

It has been a difficult adjustment for the coal industry here in Queensland and in New South Wales. Unfortunately, jobs have been lost within the sector and there have been flow-on effects for supporting industries and the local economy.

But the process we are undertaking is essential to ensure that we have a viable and sustainable industry over the long-term. After all, the best security anyone can have is to be part of a profitable and sustainable business.

Future energy needs

So where will our future growth come from?

The reality is that we face stiff global competition.

China is the largest producer of metallurgical coal, but it’s still expected to remain a significant importer. However, most future demand growth is likely to come from outside of China, with the likes of India — a country not overly endowed with metallurgical coal — anticipated to be the most significant source of new demand.

Demand for energy coal is also expected to grow. The International Energy Agency’s modelling shows that energy coal demand could grow at a compound annual growth rate of 2.4% through to 2035. That translates growth from 5.4 billion tonnes produced today to 6.3 billion tonnes over the next 20 years.

Australia is well placed to be a part of this global growth, but if we can’t do it competitively someone else will, and the loss will be ours.

For instance, Indonesia has more than doubled its coal-export business in the last five years to produce more than 400 million tonnes of coal on an annual basis. Australia produces 421 million tonnes.

Growth rates will likely be lower than other energy sources, including gas and renewables. However, energy coal will still be the source of 35% of the world’s electricity needs.

Coal is expected to remain the centrepiece of Asia’s energy portfolio into the foreseeable future, where coal is the cheapest and most readily available source of energy. Whilst the abundance of natural gas in the U.S. has resulted in a switch to more investment in gas-fired power stations, Asia does not have the ability to switch because it lacks installed infrastructure and is still building coal plants, albeit with more efficient and cleaner technology.

In Europe, changes in policy settings in recent years have limited the growth of energy coal demand. But more recently, demand has increased again on the back of gas-supply fears and the planned retirement of some of Europe’s nuclear capacity.

For example, in Germany, electricity generated in 2012 using coal was at its highest level since 1990. The reason for this is Germany’s decision to phase out nuclear power, and coal is the next, most economical solution for the country to meet its base load energy requirements.

Like many countries, their energy choice is often driven by economics, people’s desire for affordable electricity and the influence of local endowment of resources across countries, while considering the impacts of climate change.

What this shows is the complex path that governments must navigate to develop policies that meet a country’s energy needs, support economic growth and minimize impacts of higher prices on consumers.

— For the full speech, which further highlights BHP’s Australian coal mines, visit www.bhpbilliton.com.