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Concerns of weakening US and Chinese growth and European instability have led to a drop in coal company share prices However, coal production levels and expansion investments remain robust on the back of continued emerging market growth.
By James Wellstead – Exclusive to Coal Investing News
Metallurgical coal remains hot in Asia
Among the expanding world met coal production, Australia is set to be a key expansion site. Mitsubishi Corp (TYO:8058) and BHP Billiton (NYSE:BHP) recently announced they will split a US $4.2 billion investment into seven metallurgical coal mines in the Queensland Bowen Basin region. The investment is said to be for the creation of a new mine, Caval Ridge, as well as an expansion of the Peak Downs Coilliery and are set to beginning in 2014 and will run for more than 60 years.
BHP has said they are looking for further investment opportunities in “additional expansion projects” in due course. Currently, BHP’s Indonesian IndoMet Coal Greenfield project remains in the pre-feasibility stage of which it holds a 75 percent stake in 6 coal contracts of work (CCoW).
At the end of September, BHP released their metallurgical coal projections for 2010 to 2025 and surmised that China and India will contribute to 68 percent of demand growth as the steelmaking demand grows by 3 percent in the rest of the world out to 2020. With Chinese steel production expected to grow to 1.1 billion mt by 2025 and 70 percent of planned growth coming from coastal regions, BHP—the world’s largest seaborne met coal exporter—also projected that Queensland’s Bowen Basin will provide 60 percent of global seaborne met coal trade.
While Asia appears to spur the continued growth of mining production, expansion has also occurred in a number of other coal mining basins as well. Arch Coal (NYSE:ACI), despite lower than expected profits arising from flooding in the US Midwest and rising mine costs in West Virginia, saw record export levels on the back of demand from Asian steelmakers and undersupplied global coal markets. Arch noted in its third quarter results released last week that they continue to believe in their projected figure of “106 million tons of domestic coal exports (including overland shipments in North America) during 2011, and believes [that] capacity is in place to expand those shipment levels markedly in 2012.”
Thermal demand strong despite volatility
Thermal coal production has also remained resilient in the last quarter despite international concerns over wavering US and European stability and softening Chinese demand. South Africa’s Coal of Africa, Ltd (CoAL) (ASX:CZA) reported a small increase in run of mine (ROM) production during the first fiscal quarter until September 2011, with export quality thermal coal production hitting 652,060 mt, an increase from the 644,807 mt in the same period in 2010.
Indonesian thermal coal production has also remained strong despite recent localized ownership changes of its national mining giant, Bumi Resources (LSE:BUMI). PT Adaro Energy, one of the country’s largest coal companies, recently reported that it is on track to increase its thermal coal production for the year to between 46 and 48 mt after achieving 35.3 mt of production up to the end of September.
Indonesia is the largest growth region for thermal coal exports in the world. Currently, it is expected to increase total production from 350 mt in 2011 to over 500 mt by 2015, leading to a 39 percent global increase in coal exports, an even bigger share increase than Australia.
Biggest challenges are wealth imbalances
While the current developed world economic volatility has impacted the global energy and industrial growth outlook of coal, PT Adaro Energy’s President Director Garibaldi Thohir said the biggest challenge facing his company is “actually the gap between rich and poor. It is not only happening in America, where there are historic protests against Wall Street.”
Recent acrimony over the introduction of the mining tax legislation into Australian parliament is a testimony to the challenges brought on by wealth imbalances. The law, a revised version of the former super-profits mining tax, will levy a 30 percent tax on coal and iron ore mining companies with profits over AUS $50 million in mining profits, but is hotly contested over whether it is actually the small and medium-sized firms who are more likely to be impacted by the tax. The rationale behind the tax is to mediate the two-speed economic growth experienced in Australia, where miners are growing much faster than non-mining sectors within the country.
As Adaro’s Thohir continues to prepare for expanded domestic production and international coal export in Indonesia, he says he spends 60-70 percent of his time handling issues of wealth inequality. “To me, arranging the technical issues is quite easy, meaning you have the best engineer and mining contractors. But, the non-technical issues are tougher.”
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.