HSBC joins major miners in turning away from further metallurgical coal mine development

The apparent end of the unofficial Chinese ban on coal imports from Australia is unlikely to have a significant impact on Asian seaborne thermal coal markets but it may have some impact on metallurgical coal, of which Australia is by far the largest exporter.

However, distant clouds may be starting to gather for metallurgical coal, and miners and financiers already appear to be noticing.

Distant clouds may be starting to gather for metallurgical coal, and miners and financiers already appear to be noticing.

China’s crude steel production dropped for the second successive year in 2022. The end of COVID lockdowns and a recovery in its slumping property market could see a rise this year, but in the longer term China’s maturing economy is going to need less steel.

In addition, the Chinese government is targeting peak steel emissions no later than 2030 and an increase in production from scrap steel recycling through electric arc furnaces that don’t use coal from 9% to 15% by 2025.

While India becomes the key steel growth market, demand for imported metallurgical coal in China – which produces the majority of the world’s crude steel – is heading for long-term decline.

Peak carbon emissions in the Chinese steel sector may be achieved sooner than 2030.

Peak carbon emissions in the Chinese steel sector may be achieved sooner than 2030.

In addition, as IEEFA noted in August 2022, the steel technology transition away from coal and towards hydrogen-based processes is gathering pace and likely to happen faster than most expect.

Since then, there have been some key developments that suggest that miners and financiers are beginning to come to a similar conclusion.

In December 2022, HSBC Bank unveiled an updated energy policy that means it will no longer provide finance for new metallurgical coal mines.

In the future, this may be looked back on as a turning point. There is a long and growing list of banks that have policy restrictions on financing thermal coal but until now metallurgical coal has been left unscathed.

It can now be expected over the coming years that more and more banks will stop providing finance for further metallurgical coal mining capacity, especially as it becomes ever clearer that alternative steelmaking technologies that don’t use coal are viable.

Key metallurgical coal miners have also recently made clear they are not interested in starting new coal mines.

Key metallurgical coal miners have also recently made clear they are not interested in starting new coal mines.

Seeing the steel technology transition that’s building, Australian miner South32 made clear in August 2022 that it won’t be investing in any further metallurgical coal projects and will wind down its coal business as existing mines deplete. It will instead increase its focus on mining metals such as copper and zinc that will be required as the global energy transition continues.

South32 CEO Graham Kerr has been acknowledging increasing investor pressure on metallurgical coal projects for some time.

Then in December 2022, key Canadian metallurgical coal miner Teck Resources stated that it will not be developing more metallurgical coal capacity and instead will refocus on copper.

The world’s largest metallurgical coal exporter has also put metallurgical coal mine investment on hold. BHP has stated that it has no growth capital allocated to metallurgical coal.

The company has blamed this decision on the Queensland government’s new progressive coal royalty rates, which will see miners pay higher royalties for use of the state’s resources during periods of very high prices and superprofits.

BHP’s position is aligned with that of the Queensland Resources Council, which is continuing to pressure the Queensland government on the new royalty rates even as Australian coal miners make unprecedented profits. BHP reported its highest profit in 11 years last August on the back of elevated coal prices.

Given that no company is going to be making investment decisions based on sky-high coal prices resulting from an unexpected war in Europe, it seems likely that longer-term trends are at least partly involved in BHP’s decision.

BHP still maintains publicly that it believes the steel industry’s switch away from coal-consuming blast furnaces is decades away, despite it having already started in Europe. On the other hand, the company offloaded its 80% holding in metallurgical coal producing BHP-Mitsui Coal in May 2022.

In addition, it’s 2022 annual report discloses that BHP increased its closure and rehabilitation provision in recognition that the end of operations at its remaining metallurgical coal mines “may be earlier than previously anticipated”. BHP puts this down to both the new Queensland royalty rates and the long-term outlook for metallurgical coal.

Implications for steelmakers

A slowdown in Australian metallurgical coal investment puts international steelmakers that remain focused on blast furnaces in a quandary. The CEO of Indian steelmaker Tata Steel was in Australia in August 2022, voicing concern at the lack of metallurgical coal investment.

Tata Steel has a target to reach net zero emissions by 2045 yet is still planning to build blast furnaces in India. It is unclear to IEEFA how Tata Steel can meet its decarbonisation target on this basis given carbon capture for blast furnaces remains unproven.

Tata has said it is not looking at investing in Australian metallurgical coal mines at this time but Nippon Steel has no such reservations.

The Japanese steelmaker has a 2050 net zero emissions target and has said it is looking at making reduced iron with hydrogen instead of coal. Yet it is also planning further met coal investments in response to a dearth of new mine developments, adding to its existing Australian met coal holdings.

Nippon Steel is also building new blast furnaces in India as part of the ArcelorMittal/Nippon Steel joint venture.

Steelmakers are already coming under increasing pressure on emissions and exactly how they will achieve their net zero targets. As well as questions over the emissions of further blast furnace investment, there should be growing concern over future metallurgical coal supply. The recent withdrawal of miners and HSBC from metallurgical coal is only the beginning.

If steelmakers’ response is to invest in metallurgical coal themselves, it would only leave them open to further criticism that they are paying lip service to net zero emissions pledges.