Why BHP Pulled Back Its Metallurgical Coal Production Guidance



Coal business

BHP Billiton (BHP)(BBL) is the world’s largest supplier of seaborne metallurgical coal. Metallurgical coal is a key input in steel production, along with iron ore and manganese.

Coal shipments for a producer are a function of coal demand, rail availability, and demand for alternative commodities. A sustained rise or fall in coal shipments is a significant indicator that affects the stock value of coal producers (KOL) such as BHP Billiton, Peabody Energy (BTU), Alliance Resource Partners (ARLP), Arch Coal (ACI), and Cloud Peak Energy (CLD).

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Coal volumes

BHP’s metallurgical coal production for 1H18 fell 4% year-over-year (or YoY) to 20 million tons. Here’s what contributed to this decline.

  • Queensland production was lower for the December 2017 half-year, mainly due to the impacts of ongoing challenging roof conditions at Broadmeadow and geotechnical issues due to wet weather at Blackwater.
  • This decline was partially offset from record production at South Walker Creek, Saraji, Caval Ridge, and Daunia.
  • In contrast to metallurgical coal, BHP’s energy coal production for 1H18 increased 4% year-over-year (or YoY) to 14 million tons.
  • Energy coal production in New South Wales increased 10% due to improved stripping performance, higher truck utilization, and additional bypass coal.
  • This higher production was partially offset by a 6% decline in production at Cerrejon.

Coal production guidance

  • Due to lower-than-expected metallurgical coal production, the company has reduced its guidance for fiscal 2018 from 44 million–46 million tons to 41 million–43 million tons. It now expects lower production from Broadmeadow and Blackwater.
  • Due to this decline in production and the compensatory increase of production from other high-cost pits, BHP’s unit guidance for met coal is also expected to be impacted negatively. It’s currently under review.
  • BHP’s guidance for energy coal remains unchanged, between 29 million and 30 million tons.

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