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BHP Billiton Limited to brave depressed coal market

Despite delivering a rather bleak outlook for the foreseeable future of coal, BHP Billiton Limited (ASX: BHP) will not only maintain the commodity as one of its ‘four pillars’, but it will also continue on with its application to build what could become Australia’s largest underground coalmine at Caroona, New South Wales.

The prices of both metallurgical coal and thermal coal have been under considerable pressure in recent years. Metallurgical coal, which is used in steelmaking, has plunged from around US$300 a tonne in 2011 to just US$105 today, while thermal coal has dropped from US$130 to about US$75 a tonne. It is believed the heavy falls are largely due to an increase in Indonesian supply.

While BHP has admitted that there is no sign of relief anytime soon for either commodity with supply growth expected to continue outpacing demand growth, the miner still believes there is a much brighter future. In fact, CEO Andrew Mackenzie has forecast that by 2030, more than 70% of global energy will be supplied by fossil fuels oil, gas and coal, driven by strong demand for affordable energy from countries such as China and India.

As such, BHP will continue with its application to build the 30-year-lifetime Caroona mine which it expects could yield up to 10 million tonnes of thermal coal per year (although production would be capped at 260 million tonnes over the mine’s lifetime). However, following the Supreme Court’s decision to reject rival Rio Tinto Limited’s (ASX: RIO) bid to expand its Warkworth open-cut coal mine earlier in the week due to likely environmental impacts, BHP has stressed the point that it will not proceed with the plans unless it can satisfy all environmental requirements.

While construction could begin by 2018, BHP will continue to focus on reducing operating costs and improving productivity to maximise margins.

Foolish takeaway

Given that BHP also generates enormous revenues from its other pillars, namely iron ore, copper and petroleum, it is well positioned to weather the storm and wait for the coal price recovery. The effects are being felt more by companies like Whitehaven Coal Limited (ASX: WHC) and New Hope Corporation Limited (ASX: NHC), which have seen their share prices drop considerably more since the beginning of 2011.

In that time, Whitehaven has fallen from roughly $7.30 a share to today’s price of $1.65 – a drop of 77%. New Hope’s fall hasn’t been quite as dramatic. It is currently sitting at $3.07 a share after climbing as high as $6.60 towards the end of 2011, which resembles a fall of 53%.

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Motley Fool contributor Ryan Newman has a financial interest in New Hope Corporation, owning shares in Washington H. Soul Pattinson and Co.

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