Did BHP & friends just blow $1.3bn on a Colombian coal project? | RenewEconomy

Did BHP & friends just blow $1.3bn on a Colombian coal project?

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Have three of the world’s biggest coal exporters just blown US$1.3 billion on a stranded coal asset?

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188541-a-coal-merchant-shovels-coal-at-a-coal-yard-in-englandLate last year BHP Billiton – along with Glencore and Anglo American Plc, its two joint venture partners in the Cerrejón coal mine in Colombia – completed a US$1.3 billion expansion project to supply an extra 8 million tonnes of thermal coal a year to the global market.

The Cerrejón mine expansion may have been commissioned but – since the project was given the go-ahead in August 2011 – the seaborne thermal coal market has tanked and the profitability of the existing mining project has taken a big hit. Now, despite the substantial increase in mine capacity, a Cerrejón official recently acknowledged that coal production this year may be roughly on a par with 2012 exports.

Have three of the world’s biggest coal exporters just blown US$1.3 billion on a stranded coal asset?

The coal party rages on

Back in August 2011 – when the Cerrejón Coal Company announced that it was proceeding with the ‘P40’ expansion project – the seaborne thermal coal market seemed destined to only go up. (The ‘P40’ moniker is derived from lifting the nameplate capacity of the mine from 32 million tonnes a year to 40 million tonnes, making it amongst the largest coal mines in the world. However, it is worth noting that in 2012 – well before the mine expansion had been commissioned – changes in the mine layout had seen production pushed [p. 34] to 34.6 million tonnes.)

Demand from China was booming, new coal plants were still being built in Europe – the bastion of concern about climate change – and easy money was available from international finance agencies tempting a long line of countries to go on a coal power station building binge.

To top it all off, prices were high: in 2011 coal from Cerrejón sold for US$101 a tonne with the mine generating revenue of over US$3.2 billion. With low production costs – in no small part due to the low labour costs – Colombian coal producers were ranked as the lowest cost coal exporters. In 2010 – for the first time in Cerrejón’s 25 year life – the company sold coal into the Asia-Pacific coal market. A year later, a fifth of the company’s exports were destined for the Asian market.

With a belief that the boom times would continue, the three companies agreed to each tip in US$437 million to expand the Cerrejón mine. The expansion would not only increase mine production but add an extra loading berth at the joint venture’s fully-owned Puerto Bolivar port.

In a media release announcing the go-ahead the project, BHP Billiton stated that the “ramp up to expanded capacity of 40mtpa is expected by the end of the 2015 calendar year.” BHP Billiton’s then Energy Coal President, Jimmy Wilson proclaimed that the announcement “highlights our commitment to invest in growth throughout the cycle and to continue to produce at maximum volumes to take advantage of the strong demand for energy coal.”

The Cerrejón mine has a long and controversial history, including the displacement of thousands of local residents.  More recently, residents and mine workers have opposed the joint venture’s plans to divert one of the areas few rivers – to enable access to more coal. One river diversion was defeated but another has now been proposed. The displacement or residents continues too. Last week, while a NGO delegation was in a meeting with Cerrejón management, workers were busy demolishing the house of 97-year old Don Isidro.

Things turn sour for Cerrejón

No sooner had work on the P40 mine expansion commenced than the global thermal coal price began what was to become a relentless fall.

Slowly, the optimism of the joint venture evaporated.

In a January 2014 media release the Cerrejón joint venture coyly cautioned that “as regards expectations in 2014” it was “working to produce and export a greater volume than in 2013, which could vary depending on the trend in international coal prices.” What the company didn’t say was that 2013 had been a below par year due to a 32-day strike [p. 71], so production in 2014 would have been expected to be higher anyway.

Later that year BHP Billiton stated in its 2013-2014 annual report that the P40 project had produced its first coal in the December 2013 quarter though the new port facilities were still being commissioned. “Operational issues are expected to constrain capacity to approximately to 35 Mtpa [million tonnes per annum] … in the medium term,” the company stated.

In a low-key statement in late August 2014, Cerrejón Coal announced that the expanded port was in operation and had loaded its first shipment.

None of the three joint venture partners though were in much of a mood for celebrating. None issued announcements designed to excite shareholders and analysts by boasting about the milestone they had just passed. Instead, the P40 project was born to an embarrassed silence: the era of hyping coal expansion projects was all but over.

At the time the Cerrejón expansion was being commissioned the joint venture partners were grappling with just what to do with their portfolio of thermal coal mines. In November Glencore announced that it would shut down all its Australian coal mines for three weeks from mid-December in a bid to reduce the supply glut. Meanwhile BHP Billiton had just announced plans to offload the bulk of its thermal coal assets into South32 (Cerrejon escaped being dumped and remains with the corporate mothership). Anglo American announced plans to sell stakes in or exit its South African and Australian thermal-coal operations as part of a review of assets to increase the group’s earnings.

Cerrejón faced other headwinds too. While Colombian coal – from open cut mines – is cheap to produce, its geographical location meant that traditionally over half its production was destined for Europe with the remainder exported to the US, central and south America.

However, coal markets in both the US and Europe have been hit by profound switches in electricity demand and preferred generation technology. China’s dramatic reduction in imports has hit exporters hard and undermined the global price.

In its annual reports Glencore document the slide in price for coal from Cerrejon.

In 2011 coal from the Cerrejon mine sold for US$101 a tonne but by 2014 it had plummeted to just US$67 a tonne.

In October 2014– just as the mine expansion had been commissioned – Mining Magazine reported (registration required) that the joint venture had switched focus from expanding production to cutting costs by improving the productivity of its fleet of haul trucks and excavation operations.

Things went from bad to worse. In its production review for the half year to the end of December 2014, BHP Billiton complained that “anticipated drought conditions constrained production volumes at Cerrejón given the need to manage dust emissions.”

By March 2015 Cerrejon Coal Company’s Chief Executive Officer, Roberto Junguito, told Bloomberg that Cerrejon was losing money on “a little less than 11 percent” of its current production. As production in the year to the end of 2014 was 33.7 million tonnes, the joint venture was only making money on a little over 30 million tonnes a year, less than its rated capacity before the P40 expansion.

Not surprisingly Junguito said the appetite for increasing production was negligible: “If there’s already a fraction that’s close to the profitability threshold, it’s very hard to justify additional investment … Our objective is to continue implementing initiatives to ensure that we can at least maintain our current production in a profitable way,” he said.

Junguito stated that the joint venture might export about 34 million tonnes in 2015, which is on a par with the volume produced in 2012 before the mine was expanded.

In effect BHP Billiton and its joint venture partners have spent over US$1.3 billion to expand the mine to 40 million tonnes a year capacity but are producing about the same volume as they did before the expansion.

The initial indications are that Cerrejón’s finances will be in even worse shape in 2015. In its report for the first quarter of 2015, Glencore stated that the coal from the project sold for just US$58 a tonne.

Perhaps it is a little early to classify the P40 expansion as a stranded asset but the outlook looks ominous. Chinese imports are falling fast, US coal consumption is dropping rapidly, the new Indian government is adamant that it wants to cease coal imports and European coal plant retirements are accelerating. The rapid rise in renewables and energy efficiency are increasingly posing a threat to the thermal coal’s growth prospects the industry previously took for granted.

At best BHP Billiton and their joint venture partners will be forced to defer plans to expand production until seaborne coal prices pick up. At worst, the three companies have blown over US$1.3 billion on production capacity that may never make shareholders any money.


Bob Burton is the Editor of CoalWire, a weekly bulletin on global coal industry developments. (You can sign up for it here.) He is also a Director of the Sunrise Project, a non-profit group promoting a shift away from fossil fuels. Bob Burton’s Twitter feed is here.

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1 Comment
  1. Ken Dyer 5 years ago

    What a beautiful set of numbers!

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