By R. Bruce Striegler
The 2015 Coal Association of Canada conference was optimistically billed as the industry’s preparation for “the upturn”. Held in Vancouver in September, the conference attracted fewer participants than previous years, but Canadian miners still heard from more than sixteen international industry participants, a handful of recognized commodities analysts as well as the International Energy Agency (IEA). Canadian producers are acknowledging that coal, currently in global oversupply, is being further challenged by international forces of environmental and health concerns. For the first time, the conference also featured a separate Technical Program providing in-depth information on coal technologies such as wave liquefaction and environmental controls and mitigation topics including dry coal cleaning.
While Canadian producers are feeling pressured, they might take hope from a September report by the World Coal Association whose position is that the commodity remains essential to global efforts to achieve universal energy access and alleviate energy poverty. Coal, it says, provides an affordable, available and reliable source of grid-based energy. And, according to IEA, global demand for coal is expected to grow by about 33 per cent through 2040, with demand in Southeast Asia projected to grow 4.8 per cent, year-over-year through 2035.
Across the United States, coal mines have been closing almost monthly as power plants switch to cheaper natural gas. Producers are being crippled by debt and are having to defend themselves against increased foreign competition and tougher regulations limiting greenhouse gases and other toxic emissions. A mid-September report from the U.S. Energy Information Administration showed that not only have openings of U.S. coal mines dropped to the lowest in a decade, it revealed that the number of operating coal mines in the U.S. has hit its lowest point since at least 1923, one of the earliest years on record. U.S. producers opened 103 new mines in 2013, the most recent year for which data are available, representing a 14 per cent drop when compared to the previous year. At the same time at least 270 operations were either halted or shut down in 2013. Between late 2010 and the end of 2014, the top ten publicly-traded coal companies in the U.S. saw their combined share price value drop by more than half, as hundreds of plants closed and thousands of employees were laid off.
Canadian coal miners respond to global oversupply
Things are not much better in Canada, as Teck Resources temporarily closed six of its mines in B.C. and Alberta this spring. The move was expected to cut third-quarter production by 1.5 million tonnes, or 22 per cent, to 5.7 million tonnes. There is collateral damage as well, including lower coal deliveries at railway and port loading facilities. These actions follow U.S.-owned Walter Energy Inc.’s closure in 2014 of its three of B.C. mines. Combined, these operations produced 3.6 million tonnes of coal in 2013 and employed more than 695 workers.
In spite of the gloomy state of coal, on September 16, The Stewart World Port officially opened. Stewart, B.C. sits at the head of Portland Inlet on the border between British Columbia and Alaska. The inlet is deep enough to accommodate Panamax-sized ships and is a day and a half closer to Asia than Port Metro Vancouver. The port’s private owner, Ted Picknell, is quoted in published reports saying he expects the bulk of business will come from shipping concentrate ore, currently from the Huckleberry and Red Chris mines. But equally importantly, Australian junior miner Atrum Coal is planning to use the port for a new anthracite coal mine it is developing in northwest B.C.
Peter Doyle, Vice-President Marketing and Business Development at Atrum Coal explains the Australian-listed company was set-up to develop the anthracite deposit in the remote area of British Columbia. “We have discovered and are developing what we believe to be the largest deposit of anthracite coal in the world.” Atrum controls the entire Groundhog coal field, whose 800-square-kilometre size is large enough to develop up to eight mines with an eight million tonne per year yield. Doyle says the planned first mine will produce approximately five million tonnes annually and shipping trial batches is expected by the end of this year. Atrum has signed Memorandums of Understanding with major Japanese and Korean customers. The isolated location will have access to two separate ports, 1250 km by rail to Ridley Terminal in Prince Rupert or 220 km by road to the Stewart port. Doyle says that when production reaches five million annual tonnes, a dedicated rail line would likely be built to Stewart.
U.S. coal looking to Canada for export facilities
The U.S. coal industry has turned to exports to take up some of the slack in the domestic market. From less than five million tonnes of thermal coal exports in the first quarter of 2009, shipment rose to 17.4 million tonnes by the second quarter of 2012. But cargoes have been declining since then with first quarter exports this year less than half the peak three years ago. Over the same period, exports of metallurgical coal are down nearly a third. The U.S. now commands less than one per cent of the 900 million tonne per year seaborne thermal coal trade.
In Vancouver, Fraser Surrey Docks (FSD) awaits word from Port Metro Vancouver on its application for an amendment to the hard-won coal transfer permit, granted a year ago. In the original proposal, coal from the Powder River basin in Wyoming and Montana would arrive by Burlington Northern Santa Fe railroad to FSD’s Fraser River terminal in Surrey. From there, barges were to move the coal north to Texada Island for storage and loading to deep sea vessels. With the proposed permit amendment, U.S. coal would be loaded directly from the Fraser River facility to ocean-going vessels, eliminating 640 barge trips on the Fraser River and up Georgia Strait. The originally-permitted project was estimated to represent a $33 million investment, but if the amendment is approved, Fraser Surrey Docks LP expects that figure to rise to $37 million.
On the east coast, the Donkin coal project may soon be producing again. Donkin, a vast coal reserve that stretches for dozens of miles beneath the Atlantic Ocean, was originally developed by the now-defunct Cape Breton Development Corporation (DEVCO). When the Crown Corporation closed the last coal mine in 2001, the provincial government allowed the mine to flood with ocean water to save the cost of constant pumping. Shuttered Donkin was acquired in 2014 by Halifax-based Cutlass Collieries, a subsidiary of U.S.-based giant Cline Group.
In June, Cutlass reported the mine had been pumped out, and work was underway to repair a 69kV power line, which had been out of service for many years. Heavy equipment has appeared at the site, and the company reports that it will send its first coal to Nova Scotia Power under a trial agreement, to test the quality and examine other factors to determine whether the utility can use it. Between 60 to 70 per cent of the coal from the operation will be of metallurgical grade, while the balance will be thermal coal. Analysts point out that the timing of re-opening the project would be enhanced if the company could land a long-term contract to sell thermal coal to Nova Scotia Power. In addition to the Nova Scotia property, the company is finalizing its acquisition of Coalspur Mines Ltd., whose Vista project near Hinton, Alberta consists of surface-mineable, high-quality thermal coal.
Also in Nova Scotia, Provincial Energy Ventures Ltd. (PEV), which owns and operates the Atlantic Canada Bulk Terminal in Sydney, continues work on terminal upgrading and expansion. Government dredging of Sydney Harbour began in 2012, and PEV President Ernie Thrasher told the conference that the newly-deepened harbour means that Cape-sized vessels can approach the wharf. He added that further tenders for berth and approach dredging are out, the wharf condition survey and structural analysis is complete, as are engineering and concept designs for a new wharf. The dredged material will be used to form a 13-hectare area of usable land to expand the coal-handling facility. Currently, the terminal has onsite storage for up to 700,000 tonnes of bulk commodities. The new facility will have a capacity to ship three million to five million tonnes of coal per year.
PEV plans on bringing coal from Pennsylvania through the Great Lakes to Sydney on relatively small lake ships. The coal would be unloaded at the Atlantic Canada Bulk Terminal in Sydney, and re-loaded onto Capesize vessels for shipment to global markets. The Atlantic Canada Bulk Terminal is located near the mouth of Sydney Harbour and operates a wharf that once served the largest steel plant in the British Empire. PEV is working to re-establish the site to be a world-class bulk-materials handling facility. Mr. Thrasher, through his company Xcoal, based in Pennsylvania, is a major shipper of coal from the east coast of North America to locations around the world. “We are working hard with our partners to develop an economically viable project during this challenging time in the coal market by continued evaluation of design options and impacts as well as continued evaluation and promotion for international demand for U.S. coal that can be trans-shipped through the terminal.”
Forecasts of a slow return to profitability
A regular speaker at the Coal Association of Canada’s annual meetings, Joe Aldina, principal analyst, Americas and Europe Coal Cost Research, Wood Mackenzie New York, outlined changes in the coal market since last year. “When it comes to metallurgical coal, It’s really the same old story of oversupply, the markets are still well-supplied by Australian mines. China is buying less seaborne coal, steel demand has weakened and Chinese domestic coal production is rising for 2015.” Aldina continued, pointing out that U.S. exports have been somewhat lower, although holding up fairly well to Europe in the first half of the year. “We think that we are at that pivotal point in U.S. supply where 11 million tonnes drop out of the market. They have been crushed by the strength of the U.S. dollar, which is hurting American competitiveness with European Union steelmakers.” He adds that the price of Australian coal has fallen more than U.S. coal, pricing the American product at a premium.
In his review, Aldina says that India is showing some strength in both metallurgical and thermal coal demand. “China is buying less seaborne coal, steel demand is weak and Chinese domestic coal production is rising for 2015, and therefore Australia has more coal to place somewhere else.” Average metallurgical cash costs to have fallen 36 per cent since 2012 to US$80/tonne in 2015, with more than half of the total cost reduction due to lower mining costs. “However, with metallurgical coal, we don’t see the market coming into balance until the early 2020’s.”
Thermal coal margins continue to fall despite improved costs. “At an average Newcastle spot price of US$62/tonne in 2015, we estimate 214 million tonnes of seaborne thermal coal production will operate at negative margins.” He adds that Indonesia is worse off, with an estimated 152 million tonnes at negative margin, while Russia and Australia have been aided by weakening currencies.
Some in the industry see hope from emerging new technologies. Benjamin Sporton, WCA Chief Executive noted in a September news release, “The only effective approach to meeting growing energy demand and reducing global emissions is to increase support for high-efficiency, low-emissions (HELE) coal plants and carbon capture and storage (CCS) technologies. HELE coal technologies provide significant and immediate CO2 reductions and are a key step on the pathway to CCS.” Mr. Sporton added that CCS technology is a reality, “As SaskPower’s Boundary Dam coal-fired power station in Canada is proving, this pioneering CCS project reduces greenhouse gas emissions by one million tonnes of CO2 annually, the equivalent to taking more than 250,000 cars off the road each year.” However, according to the International Energy Agency, while $2 trillion has been invested in renewable projects, only one per cent of this has been invested in carbon capture and storage projects.