Ben ButlerTue, 16 February 2021, 1:58 am
The BHP chief executive, Mike Henry, says a Chinese ban on Australian coal has added to the woes of BHP’s Mount Arthur coalmine, which the company has already written down by US$1.2bn and is trying to sell.
Writedowns of Mount Arthur and other coal assets helped drive BHP’s profit for the six months to the end of 2020 down by 20%, even as booming iron ore prices led to a rise in operating profits and a record dividend payment to shareholders.
An unofficial ban on coal from Australia has seen as many as 60 ships at a time queued up off the Chinese coast, costing suppliers tens of thousands of dollars a day in demurrage fees.
BHP said the Chinese ban was hurting the markets for both thermal coal, which is burned to make electricity, and the higher-quality coking coal, which is used in the steelmaking process.
It was a “key uncertainty” in the thermal coal market while uncertainty about China’s attitude to coking coal has “spiked”, the company said as it announced its half-year results on Tuesday.
“The industry faces a difficult and uncertain period ahead,” it said.
The company’s attempts to sell Mount Arthur are part of a plan to get out of thermal coal, but it aims to retain its coking coal assets.
Amid gloom about coal’s long-term prospects, BHP expects the mine to run at a loss this year – it costs almost US$66 a tonne to produce coal that the company predicts will fetch between US$55 and US$59 a tonne.
The mine has also been running at less than full capacity since November, when a shiploader was damaged in an accident at the nearby Port of Newcastle.
BHP has revised its plans for running the mine, based in part on geological information, Henry said.
“But we have also seen very different market circumstances, with the widening of the spreads between different coal qualities and a change in the markets to which we are able to sell Mount Arthur coal given the ban on Australian coal imports into China,” he said.
“All of those taken together have seen us go back and review what the appropriate product quality is that we wish to be selling, what the right mine plans are to produce those and what the mine plans are.”
He said BHP was also aware of the cost of rehabilitating the open-cut mine once it closes.
“We are very aware of future needs to remediate and address closure any time we divest an asset, and that has a bearing on the sorts of parties we would be willing to sell to and the structure we would put behind it,” he said.
China’s policy on coal burned to make electricity is a “key uncertainty” in trade of the fossil fuel, BHP says.
The company also says uncertainty about China’s attitude towards metallurgical coal, which is used to make steel, has “spiked”.
Ships carrying coal banked up off the Chinese coast late last year after authorities refused to let them come to port – an action widely interpreted as being due to increasing trade tensions between the two countries.
“Trade flows are adjusting to account for the available opportunities,” BHP told the ASX.
BHP’s half-year profit fell to US$3.87bn compared to the same period in 2019, driven down mostly by a total of US$2.2bn in exceptional items that included slashing the value of the thermal coal assets and US$200m of covid-related costs.
But profits from its operating business, which is dominated by iron ore, soared by 17% to US$9.8bn.
It declared its biggest-ever interim dividend, of US$1.01 a share.