The trend runs counter to the apparent need for metallurgical coal in the medium to long-term as the commodity remains a critical input for the steel necessary to enable continued economic growth in developing countries.

As a higher-value commodity than its thermal counterpart, a significant portion of metallurgical coal comes from more expensive underground mines, which also tend to have a higher carbon footprint.

For diversified miners, these ESG considerations have led to diversified miners taking action to partition their coal operations from other segments of their business. Various strategies have been adopted to achieve this goal. The most common are the sale of coal assets to external entities and the creation of a spin-off company comprising a diversified mining company’s coal assets.

In the case of a spin-off, the established spin-off company operates independently of the parent company. However, the parent company may retain a share of its spin-off or retain a claim on cash flow from the spin-off’s assets.

The Givers

BHP is leading the vanguard for divestment from metallurgical coal. This is despite the company’s current role as the world’s largest contributor to the metallurgical coal export market. The company’s divestment strategy has been in the works since 2015, when it began preparing to offload thermal and lower-quality metallurgical assets.

In early May 2022, BHP sold its 80% interest in its joint venture with Mitsui, BHP Mitsui Coal Pty Ltd (BMC) to Stanmore Coal. BMC is the owner of the Poitrel and South Walker Creek Mines in Queensland. The mines produced a combined 8.7Mt of coal in 2021.

BHP has continued its divestment strategy by confirming that it is intending to sell two more assets in Queensland: Daunia and Blackwater. The two mines produced a combined 15.1Mt of coal in 2021. The mines produce the lowest-quality metallurgical coal amongst BHP’s remaining assets.

The company’s six other remaining assets in Queensland predominantly produce premium hard-coking coal. BHP maintains that these remaining assets have a long-term place in BHP’s portfolio. The lower carbon intensity of their coal when used in steelmaking makes their retention more palatable from an environmental perspective.

Of the assets to be retained by BHP in Queensland, Peak Downs is the most significant. The site, which produced an estimated 11.1Mt of premium hard coking coal in 2022 is expected to form an important part of BHP’s portfolio as the source of carbon-efficient

Teck Resources, the world’s second-largest supplier of metallurgical coal to the export market, is also making concerted efforts to divest from its coal operations. Unlike BHP, which is seeking to sell its lower quality metallurgical coal assets outright, Teck has opted to spin off its coal assets in the form of a new entity: Elk Valley Resources. Shares in Elk Valley Resources will be distributed to existing Teck Resources shareholders.

Elk Valley Resources will hold stakes in nine coal mines across Canada, all of which produce metallurgical coal. The largest of these mines is Elkview, in which Teck currently has a 95% stake. The mine produced an estimated 8.3Mt of metallurgical coal in 2021. Teck estimates that production on an equity basis across its metallurgical coal mines will be between 24.0 and 26.0Mt in 2023.

Teck’s non-coal assets will form a new entity known as Teck Metals. Teck Metals will retain ownership of Teck’s copper and zinc assets. The corporate restructure effectively results in a split of the parent entity into two companies: one focused on steelmaking coal, the other on the energy transition.

The Takers

Arrayed against diversified miners seeking metallurgical coal divestment such as BHP and Teck Resources, are miners who specialise in coal. These coal-focused miners have reinforced their commitment to the coal sector by acquiring coal assets sold by their larger diversified counterparts.

This is particularly the case when the asset for sale is a metallurgical coal mine, as many coal-focused miners are seeking to increase the proportion of metallurgical coal in their operations in anticipation of a long-term dampening of thermal coal demand over the coming decades.

Stanmore Resources, controlled by Indonesian company Golden Energy and Resources, acquired BHP’s stake in BMC in 2022. The company’s profits soared in the aftermath, reaching US$727m in 2022, up from US$7m in 2021. The result was fuelled by the additional revenue from its newly acquired assets and volatility in the coal price in the aftermath of Russia’s invasion of Ukraine.

The upcoming sale of BHP’s stake in Daunia and Blackwater has generated a flurry of speculation about which coal-focused miner will step in to take BHP’s place.

Stanmore Resources has emerged as a leading contender to acquire one of BHP’s offered assets. Similarly, following a profitable year for Coronado Global Resources, a metallurgical coal-focused miner, the company has also been identified as a potential purchaser of metallurgical coal assets for sale.

The Future

The confidence which coal-focused miners have in acquiring metallurgical coal assets offered for sale is based on strong fundamental demand for metallurgical coal in the medium to long term.

Demand growth for metallurgical coal is expected to be concentrated in developing countries, where the majority of steelmaking capacity additions are expected to be in the form of blast furnaces.

AME estimates that 65% of global steelmaking capacity will come from blast furnaces in 2030. Although this represents a decrease from an estimated 69% in 2022, blast furnace capacity is expected to grow in absolute terms from around 1350Mt to around 1475Mt in 2030.

With metallurgical coal requirements for blast furnaces ranging from 700kg to 800kg per tonne of steel, there is expected to be considerable underlying demand for metallurgical coal in the medium term.