By R. Bruce Striegler
As executives from Canada’s coal industry gathered in Vancouver for the Coal Association of Canada’s annual conference, news broke that due to low commodity prices, mining giant Anglo American was temporarily halting production at its northeastern B.C. Trend coal mine. “Prices in the global seaborne market for metallurgical coal were down over 12 per cent in 2013, almost another 9 per cent this year, and in 2015, in nominal terms, expected to be up only two per cent,” Joe Aldina, Wood Mackenzie’s New York-based analyst, told the conference. “If you’re a producer, you don’t want to be the first to cut production, so you try and cut costs, and if costs can’t be cut enough, you’ll be forced to cut production and eventually close mines.”
The drop in world coal prices are attributed to a general economic slowdown in China as well as a glut of coal supply from Australia, where producers are battling the highest fixed costs in the business, making many wonder why there is so much uneconomic coal still on the market. Expecting prices to improve, there are new coal projects waiting in British Columbia’s Peace River area, including HD Mining International Ltd.’s Murray River project near Tumbler Ridge, and Cardero Resource Corp.’s Carbon Creek project. Continuing its regulatory approval and design process, Coalspur Mines Ltd. says its Vista Project in Alberta, with 1.1 billion tonnes of export quality thermal coal has the potential to be one of the largest thermal coal mines in North America. In her conference presentation, CoalSpur CEO Gill Winckler said, “We’re not a producer yet, but one day we will be. At this point we do not have a date.”
Aldina points out that producers have been largely successful in reducing thermal coal costs from the 2011 peak and says, “The majority of cuts so far have been in the U.S., but the culprits causing the cuts are in Australia.” He explains that production decreases in the U.S. this year will be about 11 million tonnes. “Canadian exports will be just a touch lower than last year at nearly 4 million tonnes, while in Russia we see a very small, non-material increase in production, but Australia is up about 52 million tonnes on the supply side.”
Prices not expected to rise significantly until the 2020’s
With low global prices, the impact on Australian coal producers can’t be ignored. In 2012, Australia’s 2012-13 thermal coal exports were estimated at 182 million tonnes (Mt), up almost 15 per cent from 2011-12. However, owing to lower prices, export receipts decreased by 5.6 per cent to $16.2 billion. On the metallurgical side, exports were about 154 Mt, up 8.5 per cent from 2011-12. Again, because of lower prices, export receipts decreased by almost 27 per cent to $22.4 billion.
In about the same time frame, Canada produced close to 67 million tonnes of coal; 31Mt were metallurgical and 36 Mt were thermal coal, the majority of which was used for domestic coal-fired power generation. According to Canadian customs records, the average receipt for Canadian producers in 2012, on a free-on-board (f.o.b.) basis, was $193 per tonne for coking coal exports and $98 per tonne for thermal coal exports. Almost all of Canada’s steelmaking coal was exported, only a small portion shipped to domestic users. The metallurgical coal is exported primarily to South Korea, Japan and China through British Columbia ports and terminals, accounting for over 80 per cent of Canadian coal exports.
Demand for met (metallurgical) coal is driven by China and India. Aldina says, “We still see a meaningful increase in met coal volumes, 100 million tonnes out to 2035, which is the end of our long-term forecast.” Earlier this year, Walter Energy announced a July closure of its B.C. Wolverine mine near Tumbler Ridge, employing about 415, and its Brazion mine, near Chetwynd with about 280 employees. These events, including the recent news of Teck’s “slowdown” of its Quintette operation in the same region shouldn’t materially affect the bulk of Canadian supply, says Aldina.
When discussing new projects, Mr. Aldina says that at the current rate of $120 per tonne, they’re not possible. “In terms of incremental growth from projects, it will be a number of years before we see prices get back up to where we need new capacity in the market.” Aldina says that producers will continue to struggle through 2017 and 2018. “We think prices will move above $150 to $160, but we judge it will be the 2020’s before rising to the $200 mark.” As prices slowly rise for seaborne met coal, Aldina says that when looking ahead to 2025 for which year Wood Mackenzie has a $221 benchmark per tonne forecast price, that Canada is one of the best positioned players. “Until then, Canada will continue to produce its baseload of met coal, and a select number of projects will come online.”
The global state of steel and its impact on the coal market
Dr. Neil Bristow, founder of H&W Worldwide Consulting and an internationally recognized expert in steel and steel-making raw materials told the conference that global steel and pig iron has experienced slow growth post-2009. “We’re actually producing less pig iron today, in many areas apart from China, than we were years ago. The developed world has not contributed to the growth and demand for pig iron as projected and that obviously has implications on coke and coking coal consumption.”
Dr. Bristow says China’s expansion has dramatically masked weak growth in the rest of the world, with steel and pig iron declining since the global financial crisis. “Asian steel growth has risen, led by China, while the developed world has seen a reduction in output and remains below the volumes of the pre-financial crisis, we’re seeing steel plant and blast furnace closures in the developed world.” Statistics from the World Coal Association show that Asia’s steel consumption of 23.3 per cent in 2002 jumped to forty-seven per cent in 2013. The stats indicate that in 2002, NAFTA-countries consumed 16.7 per cent of total output of 822 Mt, while in 2013 that registers as nine per cent of 1481 million tonnes. In 2002, Europe’s consumption of total world supply was a little over 19 per cent, but in 2013, had dwindled to nine per cent.
Another factor that relates to coke and demand for coking coal, says Bristow, is how steel is made. “I think it an important trend to note that increasingly, steel is being produced via blast furnaces. They have improved productivity, produce more hot metal and consume more coke, and that’s what’s driving the demand for coking coal.” He says production of blast furnace steel is now up to about 71 per cent globally, adding that another factor with blast furnace steel is the increasing use of scrap iron.
“A lot of steel is traded, and always has been, but in the past few years, we’ve seen less trading in steel.” Dr. Bristow says that is interesting in terms of who makes it, who exports it and who imports it. “China has grown significantly but its steel exports haven’t yet caused a disruption in the global steel market and the global trade in steel.” Bristow points out that any extra growth in steel, particularly for imports, has now been increasingly taken by China. “China is not only supplying its own rapidly growing demand, it is supplying steel in Southeast Asia.”
China’s legion of steelmakers account for nearly half of the world’s output, and have been keeping production high to shield their market share in a fragmented industry and maintain credit lines with banks. However, with supply continuing to outpace demand as China’s economic growth slows, it is weighing on steel prices and steelmakers’ balance sheets, with many of them incurring losses.
Widening price differentials between U.S. and global steel markets
“Current prices for major steelmaking raw materials are at the lowest levels they’ve been for five years. Iron ore is down over 38 per cent this year, and met coal is down more than 25 per cent in 2014 from over $160 (U.S.) a tonne a year ago. These factors are having major implications for domestic and export suppliers of both commodities.”
Dr. Bristow notes that the U.S. recovery in manufacturing is positive for steel demand, but he also cautions that American import levels have been rising, particularly steel made in China. He says, “America has become the market where you want to export steel because the prices are highest.” There are widening differentials between the U.S. and global steel markets Bristow says, and it is the spread between domestic U.S. prices and imports, which has widened sharply, feeding Chinese exports. In the meantime, although the European manufacturing purchasing managers index (PMI) picked up in late 2013, it has again fallen back. Germany and France remain weak. “We’re seeing the modest growth in the first half of the year slow as global economic trends soften, leaving steel prices on a downward trend, except in the U.S.”
“I think we’re going to see an improvement actually beginning next year.” Dr. Bristow points out that infrastructure demands from emerging and developing markets require considerable steel. He enumerated the statistics, noting that per capita global steel demand in 2013 was 225 kilograms, with demand in China registering over 515 kg per capita. On the other hand, per capita demand in India is only 58 kg, while per capita demand in other Asian markets averages 77 kg. These low numbers suggest significant pent-up demand exists for significant growth over the next 20 years. He says between 2010 and 2025, China alone has steel requirements of between 150 to 300 Mt, India in the range of 400 to 800 Mt, Indonesia between 100 and 250 Mt, and Africa likely in the 400 Mt range. “Out beyond the next two years, growth appears to revert to the “usual” story of China and India, and we wonder if we’ll see India return to its potential.”
Major Canadian coal producers, although worried, seem reconciled and prepared for this period of low prices. Teck Resources, the world’s second largest exporter of seaborne steelmaking coal says it may be retrenching in the near-term but is also looking forward to resuming full production as the markets improve. Real Foley, Vice President Marketing at Teck Resources says, “Demand is not the issue, the problem is over-supply; there’s been especially strong supply increases from Australia which has driven prices down. All suppliers around the world are under pressure, and production cuts are beginning to take hold. We’re expecting to see more cuts due to the unsustainable low pricing levels, and this environment is also delaying future projects. At Teck, we have an industry-leading hard coking coal, a cost-competitive portfolio and we have the potential for future growth when market conditions warrant.”
This attitude was echoed by the CEO of the Coal Association of Canada in her opening remarks to the conference. Ann Marie Hann said, “The past year has been challenging for the industry with low commodity prices, mines being idled and projects being delayed. But the optimism and resiliency of the industry so vital to Canada’s economic and social well-being cannot be dampened.”