By R. Bruce Striegler

Centred on a theme of “A Sustainable Future: Coal and the Environment”, the 2017 conference of the Coal Association of Canada, held in Vancouver in late September, heard keynote speaker Ernie Thrasher say, “I was here in June last year, and I think most of us were sitting here praying we were at the bottom of the price curve, and there were presentations about the demise of the U.S. coal industry. One of the topics was how there were no U.S. coal mines that could survive in an $84 (per tonne) coking coal market and the debate was whether anyone could survive.” Thrasher outlined how many of those companies in the U.S. and Canada were undergoing financial restructuring, and how capital markets were closed to the coal industry, with large mining companies having decided that coal was not the place to be. With more than 40 years in the coal industry, Thrasher is the founder of XCoal, the largest exporter of U.S. coal to Asia, and has held various positions in mine operations and mine management, as well as marketing.

What has changed these past twelve months? According to Thrasher and other industry figures at this year’s conference, the changes include a surprising upset of many western economists’ predictions of China’s financial collapse which would have led to years of stagflation – high inflation, economy slowing with high unemployment – and the ultimate demise of the resource industry. “Surprisingly, China didn’t collapse, but the government undertook a policy to restrict working days at the mines and instituted a very stimulative monetary policy to inject credit into the system. The result of that was a 13-week spike in coal prices which we hadn’t seen since perhaps 2013.” He added that while it was good news, “If you were on vacation, you missed most of it.” The actions brought capital markets back into business, and for good or bad, kept a number of companies from finally closing, rationalized supply and brought a number of new companies back into the business.

Noting the U.S. election, Thrasher says, “The new President took a very favourable stance on the coal industry, and while he hasn’t found a way to change the price of coal, he has found a way to rescind a lot of the Environmental Protection Agency’s directives from the previous Administration which were restricting the production of coal.” In spite of these actions, the good times apply only to steel and the metallurgical coal used to make it, not to thermal coal, which is used to produce power. As reported recently by Bloomberg, “Coal’s share of the power mix is declining, and wind and solar remain the fastest-growing U.S. sources of electricity.” A stunning example can be found in British Columbia, where in August 2016, exports of metallurgical coal through Prince Rupert’s Ridley Terminals totalled zero. A year later, Prince Rupert Port Authority reported exports of metallurgical (“met”) coal had increased 1,341 percent in 2017’s first eight months compared with the same period in 2016 rising from 165,141 tonnes to 2,379,698 tonnes.

China’s demand for steel good news for metallurgical coal producers

Jose Alfaro, President of Rio Fuerte Ventures LLC, a U.S. firm that provides market analysis, commercial, and strategy consulting to the energy and mining industries, told conference delegates that coal had outperformed other commodities in 2016-17, as policy supply disruptions drove the basket price down last year to around $77 per tonne, from where it had climbed to about $177 per tonne today. China’s steel value chain is the main driver, with iron-ore and metallurgical coal imports steadily rising. He pointed out that Chinese demand had tipped the balance, pushing prices up over the past 12 months. Alfaro noted that the principal American coal-producing basins have showed varying degrees of recovery, with the North Appalachian and Powder River basins performing the best. Central Appalachia and the Illinois basins lag behind, but show steady progress.

According to Alfaro, the U.S. coal-fired power industry has lost about a third of its capacity, as more gas and renewables came on line. He noted the astonishing speed with which alternative gas sources, such as the Marcellus and Utica shale formations, came to market, shooting from 0 per cent to 30 per cent of generation in only a few years. Production in Canada is sourced from 24 mines, primarily located in the West. B.C. leads with ten mines, Alberta has nine, Saskatchewan has three and Nova Scotia claims two. About half the coal produced in Canada is thermal, used in power generation which is expected to see a steady decline as the country moves to phase out coal-fired plants by 2030. The majority of Canadian metallurgical coal is exported to Asia. Canada’s National Energy Board expects that by 2040 coal production will drop to 34 million tonnes, with almost all remaining production focused on higher-quality metallurgical coal used to make steel. In March of this year, Teck Resources Ltd. said that it still expects to produce 27-28 million tonnes of met coal this year to make up the bulk of Canadian production.

Alfaro believes that the industry has “rightsized” in response to a significant decline in thermal coal demand. Coal-fired generation will continue to face challenges from gas and renewables going forward, with gas prices globally influencing thermal coal’s trajectory going forward. He cautioned that while 2017 could be seen as a recovery year, more price volatility is to be expected, with the big unknown being what the next market disruption could be.

“Following a decade of misery, the good times are now”

Continuing the global review of coal, Wood Mackenzie senior research analyst for the Americas and Russia, Natasha Tyrina, noted that, at current prices, based on about $90 per tonne Newcastle coal, almost the entire pipeline of 600-million tonnes of thermal coal projects could be incentivised, with the outlook for the 200-million tonnes of met coal projects remaining flat until growth in India’s steel sector starts to take off. Tyrina noted that Australia and Indonesia were the new-project heavyweights for new coal projects, along with supply from Canada, the U.S., Colombia and Russia, and she agreed that China will remain a key market driver for many years to come. “Chinese coal sector policies and supply outages elsewhere have given a new lease on life to coal markets in recent months. Prices are high and margins strong after several years of losses and under-investment. The current price levels, as well as the focus on supply diversity can incentivise new project development in the seaborne market,” she stated.

H&W Worldwide Consulting principal Dr. Neil Bristow says, “Following a “decade of misery” for steel markets, the “good times” are now, though how long it will last is debatable.” Bristow noted that, assuming “business as usual” continues, the global steel industry could see a sustained period of prosperity. “Twenty-eighteen looks positive and trends suggest 2019 could see more of the same. There is more uncertainty in 2019, but a continuation of benign policy settings and a lack of disjointed policy changes could lead to an extension of further ‘good times’,” he said. According to Bristow, the steel industry is experiencing stronger demand and better pricing based on improving fundamentals. “Not unexpectedly, China has been one of the major drivers, though the rest of the world has also picked up and trends show a continued positive outlook,” he says.

However, and surprisingly so, Indian demand has been disappointing. Bristow says the outlook for 2018 to 2020 seems encouraging, suggesting that the ‘good times’ can continue despite risks, both structural and unpredictable, and he noted, “Highlighting consolidation, meeting environmental targets, ensuring a licence to operate, efficiency and cost reduction, as some of the current trends in the industry.”

How long the good times will last for steel and met coal producers depends on a host of global factors, several speakers at the conference said, and how much Canadian producers will benefit from improved prices and demand will depend on things like new mines being built in Australia. Metallurgical coal is one of B.C.’s most important exports. It’s an industry that has come through a half-decade-long contraction that saw coal companies go bankrupt and close mines – including three owned by the now-bankrupt Walter Energy. Two of them reopened last year when Conuma Coal Resources Ltd. bought the three idled Walter Energy mines, which explains how steelmaking coal exports through Ridley Terminals went from nothing in August 2016 to 294,125 tonnes in August 2017.

The Coal Association of Canada used the occasion of the conference to honour industry pioneer and researcher Ross Leeder with its 2017 Award of Distinction. Dr. Leeder was recognized for his research and advocacy contributing to the coal industry. Throughout his career, Dr. Leeder worked to develop better International Standards for Canadian coals. In his work with Canada Centre for Mineral and Energy Technology (CANMET), Dr. Leeder’s research established the value of Canadian coal, which improved international trade, and contributed to the growth and development of Canada’s metallurgical coal trade. He worked with many coal mining companies in western Canada on all aspects of mining, processing and beneficiation technologies, but specifically to improve technologies to upgrade Canadian coals. Over the past 30 years, Dr. Leeder worked for several coal companies, always championing Canadian coals in international markets.