Oct 16, 2012 (Dow Jones Commodities News via Comtex) -- MELBOURNE-- BHP Billiton Ltd. (BHP) is unlikely to expand its Australian coal business given the increasingly tough market conditions and a slump in commodity prices, Chief Executive Marius Kloppers said Wednesday.

A combination of rising taxes, royalties, a strong Australian dollar and falling productivity mean that even though the company's metallurgical coal deposits in Queensland state are of a high quality "further investment to grow these operations is much less likely," Mr. Kloppers said.

Power and labor costs have risen sharply in recent years as Australian mining companies have ramped up production to meet booming demand from China and elsewhere in Asia for raw materials like iron ore, coal, copper. The Australian dollar has traded above parity with the U.S. Dollar for much of 2012, within striking distance of 30-year highs, making Australian exports less competitive and adding to operating costs for an industry that is based around the U.S. currency.

"It is difficult to envisage further incremental capital investment until the fundamental issues affecting competitiveness are addressed," Mr. Kloppers said in a speech to the Brisbane Mining Club.

Although the company stands by its strategy of investing through swings in commodity cycles, it will only operate mines that generate cash and remain profitable, Mr. Kloppers said.

"When assets or projects are not delivering to expectations, we will take necessary action," he said.

The remarks come as mining companies across Australia have been retrenching operations as prices for industrial metals and minerals have fallen sharply. Producers of coal used in both steel production and electricity generation have been particularly aggressive in cutting costs and shuttering operations.

BHP, the world's biggest exporter of metallurgical coal by sea, has suspended production at two loss-making mines in Queensland in recent times. The company has also cut jobs in a bid to contain costs, shelved billions of dollars in development projects and held back approval for any big new projects until at least the middle of next year.

Commodity prices have fallen sharply in recent months as China's growth has cooled, the U.S. economy has remained sluggish and Europe's sovereign debt crisis has dragged on.

"The record prices we experienced over the past decade, driven by the demand shock, will not be there to support returns over the next 10 years," Mr. Kloppers said. "What we can instead expect is demand growth at more predictable and sustainable levels and more moderated pricing."

Still, Mr. Kloppers said he remains optimistic on demand for commodities, with China's economy likely to grow by between 7% and 8% this year, less than the pace of the last decade, but still offering opportunities.

Steel use in China will continue to moderate, he said, weighing on iron ore and coal prices, but as China moves toward being a consumption-based economy there will be increased demand for materials such as copper, energy, aluminum and crop nutrients like potash. BHP currently has some US$23 billion of projects underway.

Earlier Wednesday, BHP released mixed production results for the first quarter of its financial year.

Production volumes of iron ore, the biggest driver of the company's earnings, were up 1% on the same quarter a year earlier to 39.8 million metric tons and BHP maintained its target of growing production in Western Australia by 5% in the financial year through to June next year.

Metallurgical coal production fell 4% to 8.9 million tons, dented by the closure of one of its mines in May, while copper output rose 24% to 273,900 tons as ore grades improved at a major mine in Chile.

Petroleum production also improved strongly, rising 19% compared with the same quarter a year earlier to 61.25 million barrels of oil equivalent, after production in the Gulf of Mexico resumed and volumes from U.S. shale assets bought last year rose.