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(Bloomberg Opinion) -- Executives’ pronouncements about the future have a nasty habit of coming back to bite their successors a few years down the line.
At annual results in 2009, BHP Group's then-Chief Executive Officer Marius Kloppers sang the praises of the company’s South African thermal coal business, an asset it was “really pleased to have” which would benefit from rising energy demand from India. Five years later, getting rid of the division through the spinoff of South32 Ltd. was one of his successor Andrew Mackenzie’s first duties in the job. (South32 is in turn selling the now money-losing unit).
Asked when the company released its 2014 annual results why he didn’t get rid of BHP’s thermal coal mines in Colombia and Australia at the same time, Mackenzie was equally bullish on their future: The world is “likely to invest more in energy relative to the past than we have in steelmaking,” he said, so the company would retain “some of the very best energy coal mines in the world.”
Six years on, another chief executive is struggling to dispose of those pits after they racked up $214 million of combined losses in annual results reported Tuesday. BHP has already been looking at selling the mines for about a year with no real takers, so new boss Mike Henry is hoping to offer a more tempting product as an incentive — BHP’s 80% stake in two Queensland mines producing higher-value varieties of coking coal used in steelmaking. The company will look to “maximize the value” of the thermal and coking coal mines by selling to another company or via a South32-style de-merger.
That would leave BHP with its larger coking coal 50-50 joint venture with Mitsubishi Corp., BMA. This is a dominant asset producing nearly a third of the best-quality coking coal in the seaborne market. Henry — a former manager of BHP’s coal unit who knows the business well — is confident it will prosper. “We believe that a wholesale shift away from blast furnace steelmaking, which depends on metallurgical coal, is still decades in the future,” the company said.
It’s tough to make predictions, especially about the future — but Henry’s successor may one day come to rue that forecast, too. To see why, consider BHP’s defense of the business. Much rests on the relative young age of blast furnaces in China (10-12 years) and India (18 years).
This is indeed likely to be a decisive factor in how fast the world shifts from conventional primary steel production, which generates about as much carbon emissions per metric ton of steel as you get from burning a ton of coal. Steel made in electric arc furnaces can eliminate as much as 95% of carbon pollution. It also offers more operational flexibility than blast furnaces, which must operate at constant levels for decades at a time, one reason why the U.S. has almost given up on traditional primary steelmaking in recent decades.