With Bowen Basin coal output set to rise steadily in the next few years as industry heavyweights such as BHP Billiton, Rio Tinto and Xstrata ramp up sales in response to burgeoning consumption in China, Japan, India and elsewhere, the challenge of expanding capacity profitably – one that has faced previous generations of company leaders and usually beaten them – has again been laid at the feet of Australian producers.

It is a challenge made more tantalising by the record high level of contract coking coal prices – currently about $US125 per tonne – and domestic pressures in the form of infrastructure constraints and surging mining and development costs.

Underpinning export receipts of about $8 billion a year and Australia’s position as the world’s largest supplier of coking coal (with 51% of global coal exports, according to the World Coal Institute), Queensland’s Bowen Basin is producing more than 80% of the state’s annual coal haul and this could expand further in years to come as at least a dozen new projects come on-line.

Industry analyst Clyde Henderson, from Energy Economics, said while there were indications the global steel market was slowing after the rampant growth of 2004 – during which time the strategy was about securing supply as opposed to securing the cheapest coal – the impact on Bowen Basin producers and the sky-high prices they were enjoying might not be significant.

“Queensland is the dominant player in the premium hard coking coal market and what happens there is very important in terms of price and the whole market dynamic,” Henderson said. “The coal market has been strong for a while now – we are in an absolutely unprecedented market boom – and although the impact of a slowdown (in steel demand) will eventually flow through to coking coal demand, any decline in price is likely to be small. The general feeling in the marketplace for the next year or so favours a rollover of the existing price, but in reality I think there will be a small price reduction to somewhere between the current $US125/t and $US100/t. Our forecast is that prices will stay at very high levels for at least the immediate future.

“China is certainly the big player when it comes to demand, and when that first came to light in late-2003, there was a very rapid change in the marketplace. It is fair to say that in early-2003, the export coal industry was pretty much doom and gloom – the market was down, the Australian dollar was ordinary and things were pretty rough for producers. Around the end of the year, though, there was this quite remarkable change, driven to a large degree by a swing of around 10 million tonnes in China’s net coal exports. In a market that is only about 200Mt, it was a fairly substantial hit.

“I think the industry worldwide was generally unprepared for that swing. Only now are we starting to see extra supply coming into the market with expansions of existing mines and new ones coming on-stream, and the Bowen Basin is good example of that trend.

“The supply/demand situation is far greater right now for coal than most other commodities. China’s imports of coking coal are in the order of 6Mt per annum, having grown from about 2Mtpa in just 12 months, and while the growth itself is huge, the quantum is still fairly small. But there is a bit of uncertainty in the marketplace (regarding China) that is unlikely to be resolved in the short-term.

“The key for (local) producers is to make plans for demand to be at the high end of the spectrum but to also be careful not to commit any more than is necessary. Put in place all the things you need to undertake your extensions or expansions but do not commit to them until you really have to. It is the age-old scenario when you are developing a mine or expanding an existing one in boom or bust, and that is you want to be careful that what you are working on is competitive and reasonably low on the cost curve.”

With China’s steel needs having grown by 20% since 2000 and consumer demand, particularly for cars and homes, creating further demand for the products that drive coal demand, big name locals such as the BHP Billiton Mitsubishi Alliance (BMA) – Australia’s largest coal producer and exporter – and Rio Tinto Coal Australia have stepped up to the plate to lead the expansion charge.

BHP’s announcement last year of a $358 million program to lift its metallurgical (including coking and pulverised coal injection, or PCI, coal) production capacity from 52Mtpa to 59Mtpa by 2006 involves seven of its own mines (Goonyella, Peak Downs, Saraji, Norwich Park, Gregory, Crinum and Blackwater) and two which it manages for BHP Mitsui Coal (Riverside and South Walker Creek), all located in the Bowen. The investment includes the imminent start-up of the $102 million Broadmeadow punch longwall underground mine in the northern part of the Basin, designed to produce 3.6Mtpa of high quality coking coal, as well as plans to lift annual throughput capacity at the Hay Point coal terminal, south of Mackay, to 40Mtpa – an increase of 6Mt over a record 34Mt put through the facility in the year to 30 June 2004.

“Our planned growth is in response to increased demand for high quality metallurgical coal for the international steel industry and builds on the strategy to respond to current market opportunities with flexible, low cost production. BMA is also examining options to expand production capacity significantly further, in-line with market demand,” the company said at the time.

BHP also announced its intention last year to increase production capacity from all of its Australian operations to 100Mtpa by 2010, compared with 58Mtpa in 2003-04. The additional production will consist mostly of hard coking coal and be achieved through the development of the Bowen Basin projects (accounting for about 80% of the planned increase) as well as new mines in New South Wales and Indonesia.

“In all of BHP’s announcements about the metallurgical coal market, it not only...click here to read on.