• BHP is holding firm on its positive outlook for met coal demand after the commodity helped drive a massive profit in FY22
  • BHP’s top analyst Huw McKay says scrap nationalism in Europe could hurt efforts to decarbonise steel in Asia
  • The world’s biggest miner announced it wants to increase iron ore production as boss Mike Henry tips Chinese commodity demand will provide tailwind for commodities

BHP’s (ASX:BHP) stunning full year financials have laid bare just how important coal remains to the business.

To its supporters, BHP is the realist of the major iron ore miners, a strong performer under current CEO Mike Henry that talks straighter than main rival Rio Tinto (ASX:RIO) and is free of the bombast and marketing glitter of Andrew Forrest’s Fortescue Metals Group (ASX:FMG).

To its critics it is a barnyard pig made-up as Cinderella, using the facade of ‘future facing commodities’ like nickel, copper and potash to mask the fact its core earnings are made in far dirtier industries.


Major driver

Coal was a major driver of BHP’s US$30.9 billion profit in FY22, with the met coal and thermal coal assets owned by the world’s biggest miner in Queensland and New South Wales delivering an additional US$9.2 billion in earnings as prices hit record highs following Russia’s invasion of Ukraine.

Around US$1.87b of that came from the Mt Arthur thermal coal mine in New South Wales, which BHP will keep and run down by 2030 after failing to find a buyer this year.

The rest was from its 58Mtpa BHP Mitsubishi Alliance met coal mines in Queensland.

BHP has long said met coal has a multi-decade future because blast furnaces are likely to be the dominant steelmaking technology into the middle of this century, despite the need for the steel sector to act on its 8% share of global carbon emissions.

While some studies are under way to try advance green steel, this is broadly true and a reason why BHP sold its “lower quality” BMC mines to Stanmore (ASX:SMR) this year but is continuing to invest in its hard coking coal assets within the BMA umbrella.

“Longer term, we see the steel industry moving towards green steel but the nature of where technology to enable that is at currently means that it’s not going to happen in the very near term,” Henry told reporters in a media call today.

“This is going to be a multi decade process. In the meantime, steel makers still have to decarbonise, but they’re going to have to decarbonise the blast furnace steelmaking route, so they have to reduce the emissions footprint of blast furnace steel production.

“One of the levers they have available to them to do that is to move to higher quality metallurgical coal, and so you’ve seen us optimise our portfolio to sell those coals like we had at BMC that are not of the very highest quality, to focus the portfolio on higher quality coking coals, which we see as having upside in a faster decarbonising world.”


Growth of coal

The growth of coal in BHP’s revenue mix thanks to an unforeseen price spike for energy products has exposed it to more criticism from green groups and activist investors.

The Australasian Centre for Corporate Responsibility came out swinging.

“BHP’s results continue a key theme of this reporting season: companies in the business of fossil fuels are thriving whilst communities suffer in the face of war and escalating climate-fuelled catastrophes,” ACCR climate lead Harriet Kater said.

“Coal delivered a whopping 24% of BHP Group total revenue in FY22, up from just 9% in FY21.

“Whilst it’s easy to forget the scale of BHP’s coal business compared with other divisions, its annual coal production for FY22 was more than double that of producers like Whitehaven Coal.

“A key difference between BHP and the pure play fossil fuel producers is that it positions itself as a climate leader.

“Climate leaders don’t develop new coal mines.”

Equally, Kater was critical of BHP’s complaints about a new coal royalty regime in Queensland, which has introduced three new tiers including 40c in the dollar at the highest level on every tonne of coal sold above a price of $300/t or more.

BHP has said it will not be able to provide capital expenditure forecasts for its BMA coal business because of the royalty increase, even though the highest payment band only kicks during times of super-high prices, like we are currently seeing.

“Even though BHP is enjoying a 225% increase in prices for metallurgical coal, it is persisting to cry poor about the recent changes to Queensland’s coal royalties regime,” Kater said.

“As a major iron ore and metallurgical coal producer, valid questions need to be asked about whether BHP is acting in good faith with regard to the urgent need to decarbonise the steel sector.”


Other issues for steel decarbonisation

But there could be other, more pressing issues when it comes to decarbonising the steel industry than simply phasing out metallurgical coal.

For every tonne of steel made in a conventional blast furnace, 2t of CO2 is dispersed into the atmosphere.

Each tonne of steel made with scrap steel in an electric arc furnace generates around a quarter of that, even less if renewable energy is used to power the process.

EAF and increased scrap use is one of the major initiatives China is using to limit carbon emissions from the steel sector in the near term.

But BHP’s chief analyst Huw McKay said in its full year economic and commodity outlook today that “scrap nationalism” in Europe could pose a serious threat given the limited availability of scrap within China itself.

McKay warned against a scrap export ban rumoured to be being contemplated in the EU, which he said would incentivise the building of new blast furnaces.

“It would be perverse if decisions were made in Europe seeking to assist the local industry to pursue transitional rather than end–state technology, while developing nations are left stranded from some of the feedstock that would allow them to bring about an early step change in the emissions profile of their young and expanding fleets,” he said.

“As we are fond of saying – both because it is true and also because it serves as a timely reminder and reality check for Eurocentric views – the decarbonisation battle cannot be won in Europe alone, but it can certainly be lost in the developing world. That is particularly true of steel.

“That is why we are focusing our Scope 3 research and development partnerships in steelmaking on Asia, where our five MOU partners to date represent around 13.4% of reported global steel production, almost 6 percentage points more than EU production combined.

“Unsurprisingly, their share of global pig iron production is even higher. Looking at our partners via the nations they represent rather than as standalone entities, around 70% of crude steel production is covered and around 80% of pig iron.”


Plateau but BHP steel wants to lift production

BHP now views Chinese steel production not through the lens of a peak, as was the concern a few years ago when rising production and falling demand in China sent prices to US$38/t in 2015.

Having hit a high of 1.065Bt in 2020, BHP now says steel output may have plateaued.

In that context, it still thinks it can lift output in the Pilbara without overloading the market.

Along with its financials BHP revealed plans to de-bottleneck its Pilbara network to move from 278-290Mt in FY23 to 300Mtpa in the medium term, with studies on developing new mines and port infrastructure to get it to 330Mtpa in the longer term.

“Our base case remains that Chinese steel production is in a plateau phase in the current half decade, with the literal “peak” to be the cyclical high achieved in this phase (with 1065 Mt in 2020 being the “clubhouse leader” in golfing terms),” McKay said.

“Strategically speaking, it is the plateau concept, not the peak concept, that matters now. Having attained and sustained 1 billion tonne plus run-rates for three years going on four, defining the literal peak year and/or level is no longer anything more than a tactical question.”

Henry told media and analysts yesterday he was bullish about Chinese commodity demand coming out of its Covid lockdowns, saying he thought it would still be an ‘economic tailwind’ in the year ahead for commodities like iron ore.

ACS Accent Resources NL 0.042 -9% -9% -25% -19% $ 19,573,145.89
ADY Admiralty Resources. 0.01 43% -17% -44% -41% $ 11,732,212.38
AKO Akora Resources 0.175 9% -3% -52% -20% $ 11,357,449.92
BCK Brockman Mining Ltd 0.033 6% -13% -45% -20% $ 306,247,660.32
BHP BHP Group Limited 40.51 4% 12% -6% -14% $ 197,025,618,554.80
CIA Champion Iron Ltd 5.19 4% 12% -24% -15% $ 2,751,467,430.32
CZR CZR Resources Ltd 0.015 -6% -6% 88% 50% $ 52,294,849.16
DRE Dreadnought Resources Ltd 0.088 4% 91% 126% 100% $ 282,816,120.24
EFE Eastern Resources 0.032 3% 28% -41% 78% $ 32,943,871.32
CUF Cufe Ltd 0.021 11% -5% -46% -69% $ 20,288,359.67
FEX Fenix Resources Ltd 0.325 10% 10% 41% -2% $ 174,788,454.40
FMG Fortescue Metals Grp 19.43 2% 19% -10% -13% $ 58,900,598,881.34
FMS Flinders Mines Ltd 0.47 -5% 0% -9% -47% $ 81,047,316.96
GEN Genmin 0.25 4% 16% 22% 0% $ 73,654,841.00
GRR Grange Resources. 1.315 10% 16% 68% 121% $ 1,504,540,307.40
GWR GWR Group Ltd 0.089 -2% -26% -46% -66% $ 29,551,932.26
HAV Havilah Resources 0.345 23% 41% 97% 77% $ 117,156,507.70
HAW Hawthorn Resources 0.085 -6% 5% -6% 89% $ 28,348,827.11
HIO Hawsons Iron Ltd 0.32 -3% -26% 73% 156% $ 229,726,414.50
IRD Iron Road Ltd 0.14 0% -7% -24% -33% $ 115,979,889.08
JNO Juno 0.125 -7% 0% 9% -32% $ 16,957,250.13
LCY Legacy Iron Ore 0.02 5% 11% 5% 33% $ 140,950,176.38
MAG Magmatic Resrce Ltd 0.089 19% 24% -9% -36% $ 22,649,325.02
MDX Mindax Limited 0.059 0% 0% 37% 20% $ 115,533,663.12
MGT Magnetite Mines 0.026 -4% 18% -20% -23% $ 102,377,625.46
MGU Magnum Mining & Exp 0.045 7% 18% -38% -63% $ 23,451,598.10
MGX Mount Gibson Iron 0.485 -7% 3% -7% -36% $ 617,389,696.83
MIN Mineral Resources. 60.57 5% 40% 25% -2% $ 11,517,472,438.41
MIO Macarthur Minerals 0.2 21% 18% -46% -62% $ 32,250,697.60
PFE Panteraminerals 0.14 0% -3% -28% -64% $ 7,210,156.80
PLG Pearlgullironlimited 0.039 -5% -29% -41% 0% $ 2,086,287.70
RHI Red Hill Iron 3.49 -1% 4% -3% 10% $ 217,653,988.09
RIO Rio Tinto Limited 95.93 -4% 3% -19% -20% $ 35,365,768,707.78
RLC Reedy Lagoon Corp. 0.016 -6% -16% -43% -27% $ 8,918,830.59
SHH Shree Minerals Ltd 0.01 25% 11% -44% -9% $ 12,384,868.92
SRK Strike Resources 0.13 0% 30% 13% -40% $ 36,450,000.00
SRN Surefire Rescs NL 0.016 -11% -27% 7% 7% $ 25,301,815.63
TI1 Tombador Iron 0.028 4% 22% -26% -57% $ 31,425,109.46
TLM Talisman Mining 0.155 3% 15% -9% -23% $ 29,568,970.78
VMS Venture Minerals 0.029 -3% 0% -28% -71% $ 53,678,642.94
EQN Equinoxresources 0.17 13% 31% -19% 0% $ 7,650,000.17
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Iron ore prices hit by Chinese activity report

Official Chinese activity and spending data came out weaker than expected this week, giving a kick in the butt to iron ore prices.

Steel output in July slowed considerably, falling 6.4% year on year to 81.4Mt.

That reflected sliding steel mill margins and calls from Chinese authorities that production by the industry remain below 2021 levels (1.03Bt).

“The fall in China’s daily steel output in July has meant that China’s daily steel output is now tracking at levels that if maintained from August to December will see China’s steel output decline from 2021 to 2022,” Commbank metals analyst Vivek Dhar said in a note.

“Given the policy objective to reduce China’s annual steel output this year, it may be the case that policymakers do not need to enforce steel output cuts this year.”

Singapore iron ore futures have fallen over the last week, trading for around US$106/t yesterday. That’s not a huge concern for BHP, which expects to incur unit costs of US$18-19/t in FY23 (though heavy inflation has seen that rise from under US$13/t in FY21 and a touch over US$15/t in FY22).

It could put some pressure on margins for smaller miners, however, like Mount Gibson Iron (ASX:MGX), which yesterday flagged a non-cash impairment in its coming accounts of around $150m on lower iron ore prices.

Coking coal futures were trading for US$232.7/t yesterday, with thermal coal still at extraordinary levels of US$407.65/t.

NAE New Age Exploration 0.006 0% 0% -60% -45% $ 11,487,191.28
CKA Cokal Ltd 0.21 14% 35% 27% 56% $ 197,179,285.80
NCZ New Century Resource 1.86 1% 24% -2% -33% $ 242,332,819.05
BCB Bowen Coal Limited 0.32 14% 31% 39% 129% $ 502,798,891.40
LNY Laneway Res Ltd 0.005 25% 11% -25% 16% $ 31,510,082.05
GRX Greenx Metals Ltd 0.27 0% 35% 42% -6% $ 68,477,525.28
AKM Aspire Mining Ltd 0.086 -1% -8% 8% 15% $ 44,164,417.70
AVM Advance Metals Ltd 0.01 0% -9% -44% -33% $ 4,778,774.02
AHQ Allegiance Coal Ltd 0.12 -8% -77% -78% -83% $ 52,625,718.90
YAL Yancoal Aust Ltd 5.32 12% -7% 65% 122% $ 6,839,876,283.66
NHC New Hope Corporation 4.38 11% 5% 77% 110% $ 3,662,371,160.80
TIG Tigers Realm Coal 0.019 9% 19% 6% 90% $ 248,267,344.99
SMR Stanmore Resources 2.31 31% 22% 114% 241% $ 1,965,012,101.64
WHC Whitehaven Coal 6.61 9% 18% 117% 178% $ 6,263,579,320.60
BRL Bathurst Res Ltd. 0.905 -10% -17% 15% 33% $ 181,791,791.00
CRN Coronado Global Res 1.745 15% 5% 29% 75% $ 2,925,411,758.85
JAL Jameson Resources 0.085 0% 21% 13% -11% $ 29,597,281.52
TER Terracom Ltd 0.86 8% 20% 182% 455% $ 666,206,086.84
ATU Atrum Coal Ltd 0.009 29% 29% -63% -80% $ 6,222,315.02
MCM Mc Mining Ltd 0.215 -9% 72% 165% 72% $ 41,507,522.70
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