Power coal has generated big profits for miners over the years, but these days it mostly generates trouble. That doesn’t mean getting out of the business is easy.
Australian mining giant BHP signaled in May that it is losing interest in thermal coal, and reports in Bloomberg and the Financial Times last week suggested the company is actively exploring possible options for an exit. Rio Tinto, BHP’s Australian rival, divested its last coal assets in 2018. Big miners have increasingly come under pressure to cut exposure to the rock from investors like Norway’s huge sovereign-wealth fund, which in June announced plans to divest significant portions of its fossil-fuel portfolio.
BHP has good reasons to consider an exit. Metallurgical coal, used to make steel, is a big earner for the company. But thermal coal only accounted for around 4% of its underlying earnings before interest, taxes, depreciation and amortization in the half-year through December. Return on capital employed was also lower than for the company’s marquee iron-ore and met-coal assets. And Asian thermal coal benchmark prices are down about 25% since December, so returns will likely be lower still this year.
Moreover, these relatively unimportant assets come with outsize political risk. Coal producers face not only the risk that investors eyeing so-called environmental, social and governance benchmarks will desert them today, but also the possibility that a tougher global carbon regime could crush profits in the not-too-distant future. On top of that, Australian producers are dealing with falling exports to China, the world’s largest coal market—a trend that may be related to Canberra’s decision to ban Chinese telecom champions Huawei and ZTE from its 5G network. China imported close to 3% less coal from Australia in the first five months of 2019 compared with the same period the year before. Imports from Indonesia and Russia were up 7.5% and nearly 15% respectively.
The problem is that with coal prices in the dumps and the world economy looking shaky, it isn’t a great time to unload assets. One possible buyer is China itself. Eventually, Beijing may tire of toying with coal imports and forcing its heavily indebted power companies to contend with inflated domestic coal prices. Once the diplomatic spat over Huawei cools, China-controlled companies like
which snapped up a portion of Rio Tinto’s coal assets in 2017, might get back in the acquisition game.
For both political and economic reasons, BHP’s efforts to sell its coal could take some time.
Write to Nathaniel Taplin at email@example.com
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