Changes at the coal face

Michael Gray, CEO, NewBlack Energy

Over the last year, activists, media and southern politicians have been sounding the death knell of the Queensland coal industry. This perception ignores the reality that the Bowen Basin is the world’s richest resource of premium coking coals for the global steel industry.

Despite global pandemics, political power-games, increasing environmental activism and aspirational promises of new green-steel technology, there remains no economically or technically viable alternative to the use of ongoing coking coal in steel production.

As a result, the future looks bright for ongoing coking coal demand and opportunities for production growth from Queensland. The challenge for the Queensland coal industry is how it identifies the priority projects and how it finds and supports the explorers, entrepreneurs and investors that have the courage to seek to maximise those opportunities.

The future demand for coking coal

Since the Industrial Revolution in Britain in the late 1700’s, steel production has been the catalyst for economic development throughout the world. Steel is the backbone of the modern built environment. It is the world’s second largest commodity value chain after crude oil. It underpins daily life.

The growth of global steel production has continued to accelerate as economic development has increased living standards in the world’s most populous nations. It took almost 200 years for global steel production to reach 1 billion tonnes per annum in 2004. It will take less than 20 years for that production to reach 2 billion tonnes per annum, expected in 2021 or 2022. Importantly, almost all that growth is in Asia which now produces more than 70% of the world’s crude steel.

Chinese steel production has exceeded a staggering 3 million tonnes per day since the COVID-19 shutdown. To put this in perspective, it takes Chinese steelmakers just over 40 hours to match Australia’s total annual production of 5.5 million tonnes.

Forecast growth rates for production in India, Vietnam, Thailand, Malaysia and Indonesia exceed that of China and each of those countries has limited scope for domestic coking coal production. Despite speculation about new technologies, all commercially-produced steel is made in either a blast furnace, using sintered iron ore and coke, or in an electric arc furnace which essentially re-melts scrap steel.

Blast furnaces produced more than 65% of global steel in 2010 and, despite increasing recycling in OECD countries, that proportion has increased to 72% today in order to supply the rapid demand for high-quality steel in Asia.

Blast furnaces are hugely capital intensive (approx USD1B per 1 million tonnes/annum production capacity) and it's estimated that total investment in Asia since 2000 has been USD800B. With an operational life of 40-50 years, there is no prospect of any economically or technically viable alternative to replace that critical installed production capacity.

Every tonne of crude steel produced in a blast furnace requires approximately 770kg of coking coal. Ongoing efforts to decarbonise steel production have failed to identify any viable options to reduce this demand for coal as a fundamental feedstock in steel production.

Substantial media coverage has focused on the concept of a transition to ‘green-steel’ produced through reduction of iron using hydrogen produced from electrolysis of water using renewal energy. This concept is being initially trialled in a laboratory-scale pilot plant in Sweden.

However even the proponents, steel-maker SSAB, urge caution that subject to successful technological development, a demonstration pilot plant would not be developed until 2026 at the earliest. Any successful subsequent commercial development would then also be subject to step changes in the cost of renewal energy generation and the efficiency of large-scale electrolysis.

Ignoring these technical challenges and questions of cost-competitiveness, it is therefore unlikely that production of any niche volume of ‘greensteel’ would still be decades away. Much of the current focus of material efforts to reduce carbon intensity of steel production is therefore focused on the use of carbon capture use and storage and on the use of higher-quality coking coals.

The premium low-volatile coking coals of the Bowen Basin are therefore best placed to continue to supply high demand coking coal for the global market.

Australia, and primarily Queensland, produces more than 60% of seaborne coking coal. The industry was built on the close partnership between visionary Government and entrepreneurial explorers and investors.

The challenge for Queensland is how it maintains this leading market share to capture the future growth in demand. The critical barriers to further expansion of the industry are lack of advanced projects and lack of access to capital.

Due to market sentiment, there has been a substantial reduction in exploration activity in the last eight years. Whilst that has recovered slightly, it means that there are fewer advanced projects available for rapid development. Complex regulatory regime and increasing community opposition, particularly from communities far removed from the Bowen Basin, further complicate the path to project development.

The appetite for development of greenfield projects by major producers has reduced substantially due to shareholder activism and competing capital demands. As a result, there remains a significant portfolio of high-quality projects that are held by major producers that are unlikely to be progressed in the short to medium term.

In the 1990s and 2000s, lack of investment by major producers led to the emergence of successful junior and independent producers such as Jellinbah, Felix, Macarthur and Foxleigh. Many of these independent producers were subsequently acquired by major producers who decided it was easier to expand through acquisition than greenfield development.

Over the last five years, the industry has been transformed by the exit of major producers such as Rio Tinto and the entry of private equity funds; EMG (Coronado), EMR (Kestrel), Taurus (Foxleigh) and Denham Capital (Olive Downs).

In parallel, where once foreign investment was primarily from Japan, Korea or China, most recent foreign investment is from Indonesia in Kestrel and Stanmore. With limited access to debt markets, new development must be funded by equity investment requiring the partnership of ‘true believers’ including entrepreneurial explorers, innovative contractors, supportive investors and long-term customers.

It is clear that the significant ongoing demand for high quality coking coal provides a substantial opportunity for continued development of the Bowen Basin. The changing dynamics of investment sentiment, shareholder activism, the nature of coal resources and barriers to entry for new producers means development of new projects will become even more challenging, and require increased collaboration between Government, project proponents, investors and suppliers.

The potential benefits to the community, suppliers and the State are immense, and it is critical that the industry and Government continue to work collaboratively towards a long-term vision and not be distracted by the myriad of short term challenges.