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Technology development starting to challenge the long-term future of Australia’s metallurgical coal

August 15, 2022
Simon Nicholas
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Key Findings

It is increasingly accepted that the long-term future of Australian thermal coal is being progressively eroded by the global transition to ever-cheaper renewable energy.

We may well see accelerating technology developments start to threaten metallurgical coal’s incumbency over the coming years.

Steelmakers are now developing new technology configurations that could enable wider global use of alternative steelmaking methods, and less use of metallurgical coal, with the potential to significantly reduce carbon emissions.

As BHP seeks permission to open a new metallurgical and thermal coal mine that could operate until 2112, the long-term outlook for Australian coal exports is looking increasingly clouded.

It is increasingly accepted that the long-term future of Australian thermal coal is being progressively eroded by the global transition to ever-cheaper renewable energy.

The current global energy crisis will only accelerate seaborne thermal coal’s decline. The nations that Australia exports thermal coal to are currently faced with huge import costs that will likely accelerate their transition towards renewables. Heightened energy security worries will also likely push the likes of China and India towards increased dependence on domestic coal, pushing out imports.

BHP’s recent decision to hang on to its Mount Arthur thermal coal mine and close it in 2030, after a two-year search for a buyer came to nothing, highlights this declining outlook. It also emphasises the growing pressure on coal mine owners to keep such projects and responsibly manage them to closure rather than simply divesting them.

Meanwhile, it has generally been accepted that metallurgical coal used in steelmaking is less challenged because the technology transition away from coal-consuming blast furnaces is not as advanced as the shift to wind and solar power. BHP is enthusiastically holding on to its high-quality Australian metallurgical coal mines in the belief that demand for such product will remain robust for decades.

Steelmakers are now developing new technology configurations that could enable wider global use of alternative steelmaking methods

It is even seeking approval to open a new coking coal mine to run for 90 years – well into the next century. If approved, the Blackwater South project would also produce thermal coal.

However, as our new IEEFA report highlights, steelmakers are now developing new technology configurations that could enable wider global use of alternative steelmaking methods, such as direct reduced iron (DRI), with the potential to significantly reduce carbon emissions.

DRI does not use metallurgical coal so a significantly greater global role for this technology going forward would question long term coal demand. This ought to be of particular concern to BHP as the world’s largest producer of seaborne metallurgical coal.

BHP sticking with coking coal

BHP has started to divest its lower quality metallurgical coal mines. It offloaded its 80% stake in the BHP-Mitsui Coal (BMC) joint venture to Stanmore in May 2022. These mines produce lower-quality grades of metallurgical coal including PCI (pulverised coal injection) product.

IEEFA highlighted in May 2022 that PCI coal is starting to look as if it will be the first grade of metallurgical coal to feel the impact of technology transition.

Following this, Mitsui is now seeking to divest its stake in the same operations.

In contrast to this, BHP remains wedded to its high-quality coking coal mines in Queensland. This – along with the sale of its BMC stake – is part of the company’s strategy to focus on commodities that are fit for the future with opportunities for long-term growth.”

BHP does not have a measurable target to reduce total Scope 3 carbon emissions

BHP does not believe that high-quality coking coal demand is going to reduce any time soon, in part because of its view that a global lack of high-grade iron ore will limit the steel industry’s ability to switch from blast furnaces to direct reduced iron (DRI) processes that don’t use metallurgical coal but require ores with high iron content.

BHP CEO Mike Henry stated in October 2021 that hydrogen-based steelmaking may still be 20 to 30 years away, in contrast to many more positive views on the rate of steel technology transition. As a result, BHP considers that the majority of the world’s steel will still be produced via the blast furnace route in 2050, so providing a continuing market for its metallurgical coal.

BHP does not have a measurable target to reduce total Scope 3 carbon emissions that occur when its customers use its iron ore and metallurgical coal in steelmaking processes.

Steel technology transition gathering pace

However, steel technology developments are beginning to challenge BHP’s view.

Steel technology developments are beginning to challenge BHP’s view

Some steelmakers are starting to look at technology combinations that will allow DRI processes to use more plentiful lower-quality ore, which could help the global industry get around the potential high-grade ore hurdle.

Thyssenkrupp is intending to replace its blast furnaces with DRI plants combined with a submerged arc furnace (SAF) beginning in 2025. This configuration will allow the company to continue to use blast-furnace grade iron ore rather than trying to source DR-grade ore.

ArcelorMittal is also planning to implement a similar DRI-SAF combination, which should allow it to use lower-grade iron ore.

In Australia, BlueScope steel is working with Rio Tinto on a similar combination of DRI with a melting step that would allow the use of Rio’s Pilbara blast furnace-grade iron ore in direct reduction processes.

Although it also has no measurable Scope 3 emissions target, Rio appears to be more optimistic about the future of low carbon steel than BHP. Rio Tinto sold its last coal mines in 2018. With Vale announcing the sale of its coal assets in December 2021, BHP is now the only ‘big 4’ iron ore miner that is also a coal producer.

The replacement of the global blast furnace fleet with zero-carbon steelmaking processes is an enormous challenge. Yet solutions to some of the issues faced are already emerging. The realisation of such solutions can help lower the Scope 3 emissions of iron operations and should encourage the likes of BHP and Rio to set measurable Scope 3 emissions reduction targets.

The pace of technology transition in power generation has helped make the Mount Arthur thermal coal mine unsellable. Given that such transitions have a history of surprising speed, we may well see accelerating technology developments start to threaten metallurgical coal’s incumbency over the coming years.

Simon Nicholas

Simon Nicholas is IEEFA’s Lead Analyst for the global steel sector, as well as Asian seaborne thermal and coking coal markets.

Simon’s focus is on the energy transition, the long-term outlooks for coal and steel as well as the need for emerging nations to establish financially sustainable power systems to support their development.

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