BHP Faces Challenging Coking Coal Market on Demand, Oversupply

BHP Billiton Ltd., the world’s biggest exporter of coking coal, said the market for the fuel used to make steel remains “challenging” because of muted demand in some markets and oversupply from rivals.

“The near-term will be challenging,” Dean Dalla Valle, president of Melbourne-based BHP’s coal business, said at the opening of the $1.4 billion Daunia mine in Queensland. “We’re seeing lower prices as a result of subdued demand in some traditional markets and strong supply from some competitors.”

Prices are under pressure because of rising supply after a recovery from flood-affected mines in Queensland, and a slowdown in steel demand growth. Falling coal prices and high costs have prompted Australian producers including BHP to shutter operations and cut staff. Prices are expected to bottom this year, according to analyst forecasts compiled by Bloomberg.

Coking coal prices for the third quarter settled at $145 a metric ton, according to Australia & New Zealand Banking Group Ltd., down from $172 during the three months to June 30 and the lowest since 2009 when prices were agreed annually.

The metallurgical coal business, which BHP describes as one of its “four pillars” alongside iron ore and petroleum, has returned to profitability, Chief Executive Officer Andrew Mackenzie said last month after flooding and industrial action affected the business.

Sale Canceled

BHP, spending $5.3 billion on its Australian coal business to expand mines and port facilities, in July canceled the sale of the Gregory Crinum mine in Queensland after making operational improvements. Growth projects in Queensland will boost total coking coal capacity production to 66 million metric tons annually, Mackenzie said Aug. 20.

“We’ll still see a good long-term demand trend for metallurgical coal,” Dalla Valle said.

In Queensland, BHP operates seven mines in the Bowen Basin through the 50-50 BHP Billiton Mitsubishi Alliance, as well as two operations through the BHP Billiton Mitsui Coal partnership, where the company holds an 80 percent stake. The company’s Daunia mine will have an annual export capacity of 4.5 million tons of coking coal.

BHP last month reported a decline in profit, joining Rio Tinto Group and Vale SA, as slowing economic growth saps demand for raw materials, dragging down prices. Mackenzie cut capital spending this fiscal year as investors including BlackRock Inc. pressure mining companies to defer expansions and acquisitions.

Peabody Energy Corp. in July said it would cut 400 positions at its Australian coal mines to reduce costs and boost competitiveness. BHP shut the Gregory mine in Queensland last year, while Anglo American placed its Aquila operation on care and maintenance next month because of the outlook for prices.

With a majority of BHP’s 18 major projects nearing completion, capital spending is set to fall to $16.2 billion for fiscal 2014, the company said last month. That compares with expenditure on new projects and expansions of $21.2 billion the previous year.

Before it's here, it's on the Bloomberg Terminal.