Mike Henry, President Coal, BHP Billiton
American Chamber of Commerce
Brisbane, 18 September 2015

Thank you Paul.

I wish to acknowledge the Turrbal people, the traditional owners of the land on which we are gathering, and to pay my respect to elders past and present.

AMCHAM has permitted me a wider berth today than was originally flagged.  I thought it would be appropriate to speak to a couple of the key challenges facing the coal industry and to how we think about the future of the commodity.

To help provide a bit of context for my talk, I’ll declare my colours up front.  I’ve spent a good part of my career in the coal industry around the world.  I’ve met, and come to know, so many good people who work in this industry.  I’ve experienced the great communities that both support and are supported by the industry.  I’ve witnessed sharp improvements in living standards in places like China, supported by the provision of affordable energy and steel from coal.  Coal has played an important role in the well-being of so many and I believe that it can and will continue to play a significant, positive role in the world’s future.

Now, at the same time, I am acutely aware of the risks associated with climate change and the need to mitigate greenhouse gas emissions.

One of my accountabilities in my prior role was Health, Safety and Environment for the BHP Billiton Group and through that I stewarded our position on climate change.

We have been vocal in our acceptance of the current science on climate change and we believe that it is essential that the world achieve the twin objectives of:

• mitigating climate change to the lower end of the scenarios developed by the Intergovernmental Panel on Climate Change; and
• continuing to provide access to reliable and affordable energy to support economic development and improved living standards.

Climate change has been on the radar and part of the Company’s strategy for two decades now.

We have advocated for a global policy framework to support emissions reduction, including a price on carbon as part of a portfolio of effective response measures.

I, we, think about these issues deeply.  BHP Billiton is unique as the only resources company that supplies oil, gas, coal and uranium as well as the metals used in renewables and energy infrastructure.  This gives us particular insight into energy markets, but it also means that energy markets and how they evolve are very important to the future performance of the Company.  Our position on these issues and the importance we place on truly getting this right is also a reflection of just how important we see our reputation, which has been built through 130 years of sustainable operations around the world.

Market dynamics

So, let me speak now to how we see the outlook for coal demand.  There are two broad categories of coal – thermal or energy coal– the kind used in electricity generation and cement making.  And the other category, metallurgical or coking coal – the kind used in making steel.  BHP Billiton produces both, with a weighting towards steel making coal.

So, what does our analysis show for thermal coal?

At BHP Billiton, for planning purposes we assess different potential future scenarios and the book ends of these scenarios range from strong growth in demand at one end through to reductions in demand by 2030 at the other end.

However, our most likely scenarios, aligned to emerging climate change policies, range from flat to slightly growing demand through to slightly declining demand over the same time horizon.  In all scenarios, thermal coal demand remains a significant part of the global energy mix for decades to come.

In other words, even in a decarbonising world, thermal coal is expected to continue to play an important part in meeting the world’s energy needs well into the future.  Particularly in Asia where thermal coal supply is abundant, affordable and able to be deployed at scale.  Our outlook is consistent with other reputable forecasters.

To be clear, our Asian neighbours are deploying renewables as well, and there is no doubt that renewables are becoming ever more economical and will be increasingly important.  But the pace of energy demand growth means that even with a balanced approach to their energy mix, coal is expected to play an important role in meeting energy needs.  And while the overall market share of coal may decline, the outright cost competitiveness of coal, as well as the substantial existing base of installed infrastructure, means we can expect to see demand support for decades to come.

Turning now to the outlook for metallurgical coal or met coal for short.  There are no practical substitutes for metallurgical coal in the steel making process.  Hence the demand uncertainty associated with substitution is less for met coal than it is for thermal coal.

Met coal only makes up around 15% of global coal demand.  However, it is the premium product and it’s the one that Australia and Queensland have a differentiated position in.  Australia is the world’s largest exporter of met coal and most of this supply comes from Queensland including from BHP Billiton’s ten met coal mines here.

We expect continued growth in demand for met coal for quite a while yet, driven by ongoing economic growth in China and by the emergence of India as a major steel producing nation.  Industrialisation of emerging economies in Southeast Asia, the Middle East and Africa will also contribute to demand growth.

Chinese growth is slowing but we still anticipate ongoing growth in steel production to a peak of between 935-985 Mt in the mid 2020’s.  While China has significant domestic met coal resources, we do not believe they will become wholly self-sufficient but rather that they will continue some importing given their need for particular coal qualities and the coastal location of some of their steel mills.

India is also an increasingly important market for met coal as it continues to grow its economy.  India is lacking in domestic high quality met coal resources and hence, will be nearly wholly dependent on imported coal to feed its steel industry.

Problems

Disappointingly, this view of resilient long-run demand for coal does not translate into positive sentiment towards the industry on the part of investors and the public.

Disappointing, but perhaps not surprising.  Current industry financials certainly don’t lend themselves to a more positive view.

In BHP Billiton’s Coal business we made a 3% return on capital in our Australian assets last year and that’s at the good end of the industry spectrum.  Prices for met coal have fallen by a further 25 to 30% since the start of this calendar year and thermal coal by 10 to 15%.  There are no signs of things getting better in the immediate term.

Economic moderation in China, recently imposed effective constraints on imports into China, and very sticky supply globally, have contributed to a significant supply overhang in the markets for both types of coal.  I am optimistic that the market will improve in the medium term. But poor returns, and little indication of better times on the immediate horizon, make coal a pretty challenging business at the present time.

Research also tells us that the industry suffers from declining perceptions in the broader community, particularly outside its direct areas of operation.  This is primarily about coal’s role in greenhouse gas emissions and perceptions about its general environmental and social impacts.

The poor current profitability of the industry only then serves to reinforce the views and arguments of those who wish to paint the industry as being in terminal decline.

So what can we do about it?

Productivity and profitability

Here in Australia our industry has been working very hard to safely improve productivity and reduce costs.  That’s certainly been the case for BHP Billiton.  We are achieving record production in most of our mines and in the past three years, we have managed to reduce our unit costs by half.

However, there’s more that needs to be done.  The reality is that most of our competitors from the likes of Russia, Canada and China are every bit as focused on improving.  They have been expanding production, increasing productivity and lowering costs.  In some instances, they are achieving mine-site cash costs of $10 to $20 per tonne less than Australia.  Some of the differential has been driven by things we don’t control like currency movements or geological endowment.  But at the end of the day, all that matters is whether we are able to improve productivity sufficiently to secure ourselves at the low end of the cost curve.

As miners, we recognise that greatest accountability for this rests with us.  We can’t look to anyone else to drive the technical and commercial excellence that will ensure that we fully and safely realise the potential of our installed capacity.

Governments, though, also have a role to play in fostering productivity through creating a globally competitive regulatory framework, including on the workplace relations front.

We acknowledge recent efforts, with the Productivity Commission report proposing a number of balanced and achievable measures that would support improving productivity.  It is now up to both sides of politics to come together and carry forward as many of these recommendations as possible.  It would be somewhat ironic if the hundreds of thousands of people hours that have gone into the Commission’s process were ultimately for naught.  After all, that would seem to be a pretty unproductive process for a Productivity Commission!

The financial sustainability of the Australian coal industry is wholly dependent on our ability to materially improve and sustain levels of productivity to stay one step ahead of our global competition.  Through working with our employees to achieve this, within a supportive industrial relations system, we’ll be able to create and protect jobs in the industry.

Governments have a clear stake in this.  The coal industry is an important part of the Australian economy and it has been for more than 170 years.  We employ thousands of people in regional areas and we make a significant contribution to federal and state revenues through royalties and taxes.  In fact, the coal industry contributed around $3 billion in royalties alone in NSW and Queensland in FY13.

We need governments to redouble their efforts to reduce regulatory costs and provide long term certainty needed by an industry that makes 20 to 30 year investments.

Societal support

Now the other area where the industry has arguably even further to go, is our broader engagement with civil society, particularly as pertains to coal in the context of climate change.

We need to be more active and effective in building common ground with elements of civil society who can acknowledge the future role of coal and the benefits that flow from coal’s ability to underpin affordable energy – and who are open to exploring the possibility that it can be produced and used sustainably.

No doubt there are some who will simply never accept this and who are ideologically resolved to eradicating coal.  At the same time, I know that at the other ideological extremity, there are people who do not accept the wisdom of the world’s preeminent scientists and who deny the existence of climate change, or at least the human contribution to it.  Both of these positions involve blind faith and neither is grounded in good science.

The parties at both extremes in the debate have an apparent disregard for what the world’s most knowledgeable minds are saying and a lack of understanding as to the true costs and benefits under different scenarios.  And yet, all too often, it is these extreme positions that dominate the public discourse.  Perhaps it is not surprising that some in the debate then default to a simpler, archetypal all or nothing, black or white perspective.

It would be fair to say that as we stand here today, in the court of public opinion, the ‘no coal’ camp has been more effective.  Anti-coal activism has been building momentum over many years.

We also recognise that some groups are determined to shut coal down altogether, and they have a clear strategy to frustrate and delay coal and gas projects, to reduce community support and to influence government policy.  And while their near term impact on actual investment and policy is arguably limited, they are certainly influencing public perception.

Recent research conducted for the industry indicated that there is a widespread public view that coal use will be phased out over the next 10 to 20 years in favour of renewables.

This is in part because of ineffective engagement by many participants in the broader fossil fuel energy value chain.

Our lack of alignment and coordinated effort has undermined our effectiveness in engaging broader society on the facts and in advocating for high quality, balanced policies, including those required to support technological solutions.

We can only hope to secure balanced support for the industry if we step up and help improve the quality of debate and the depth of understanding about what we do, why we do it – and how important it is.  We should be working to address the claims made by those who seek to end fossil fuels and the coal industry – by getting the facts on the table in a respectful, balanced and easy-to-understand way.

We in the resources industry need to be even more unified in recognising the change that must occur and be an even more active part of the climate change solution.

We must come together in a way that sees us adopt a more unified, balanced and credible view in respect of climate change.  In the lead up to the Paris COP discussions at the end of the year the focus is on our industry.

And of course we need to play a continuing and even more effective role in mitigating emissions through reducing our own footprint and through supporting development and deployment of low emission technologies.

BHP Billiton recognises the role we need to play in this.  Since 2007, we have invested almost half a billion dollars in low emissions technology and we have further efforts underway.  Australian coal producers can be proud of the $300 million of voluntary funding committed to date to coal specific technological solutions.

We need to continue our targeted collaborative efforts and must work with government to support sound policies that will foster the accelerated development of important technological solutions to climate change.

At the end of the day, no-one else will tell our story for us.  We must engage our employees, communities, investors and civil society on the future of coal – a future in which our industry is part of the solution to the need to reduce global emissions.

Australian coal industry attractiveness

So, in closing, given my comments on the challenges we face, one could be forgiven for concluding that my view is that the future for the coal industry in Australia is not all that bright.  That would be a mistake.

As I noted earlier, demand for both thermal coal and met coal is expected to be supported for decades to come yet.

Australia has amongst the world’s best resources and is located proximate to key markets.  We know that there are opportunities for significant further productivity improvements which will allow for the industry to be competitive in the long-term.

And there is also an opportunity for industry to come together in a way that builds a balanced public perspective on the role of coal in the future energy mix and on climate change and how we can contribute to the reduction of global emissions.

I am confident that we and others in industry can rise to the challenge, particularly when supported on productivity by the right regulatory reform.  And in doing so we can sustain industry attractiveness in a way that is good for the states, the nation, shareholders and of course, good for the more than 152,000 Australians who work in coal or are supported through related jobs.