The landscape of its origins helps tell the story of Canadian coal. The steep peaks, perilous drops and hidden valleys in the mountain ranges of British Columbia and Alberta that bear the bulk of Canada’s metallurgical coal outline the fortunes of those who extract it. To the east, on the plains of west-central Canada where much of the thermal coal is mined, the contour of the land is more subdued. The horizon lacks the drama of the West, but allows a much longer view.
Metallurgical (or coking) coal is low in sulphur and phosphorous content and fuels blast furnaces that convert iron ore to iron, the primary material in steel alloy. It represents about 40 per cent of the 68 million tonnes of coal mined in Canada and the vast majority of the coal exported to the world market. The recent dizzying pace of industrial development, girded by the appetite for fundamental materials like steel, fired demand for metallurgical coal, while the subsequent slump dampened it.
Steady domestic demand for electricity generated from thermal (or steam) coal provides some insulation against the global economic climate. Thermal coal, which represents 20 per cent of Canada’s coal exports, is also used to fire the kilns for cement production and other industrial applications.
For either type of coal, last year was like no other. “The 2008 fiscal year for both metallurgical and thermal coal was exceptional,” reflects Ernie Lalonde, mining analyst and senior vice-president of the rating agency DBRS. “For met coal, it broke all the records. Unprecedented growth, demand in China, bad weather in Australia — everything came together. We are going to remember 2008 as an extraordinary year.”
Now, with far more modest, but still strong prices, Chinese steelmakers — after a dramatic pause — are again shopping for relative bargains in coal. “The 2009 story will be the surge in spot market activity related to coking coal exports to China,” declares Robert Stan, president of Grande Cache Coal. “And for a certain number of coking coal producers, that will make their year.”
“If you are not talking about China, you are on the wrong page,” echoes Boyd Payne, CEO of Teck Coal, the second largest supplier of metallurgical coal to the global steel industry. “China is carrying everything. It is the only country in the world where massive stimulation money could be put to work quite quickly. It has happened and has created demand. Commodities suppliers are all looking at China and wondering how long it can last, but certainly in highquality hard coking coal it has had a dramatic impact in the last six months or so.”
For Grande Cache, the turnaround was stunning. The company reported sales of only 110,000 tonnes in the first three months of the year. “It was our worst quarter ever since we started production,” says Stan. The following quarter, with prices down more than $200 per tonne, sales increased to just over a half million tonnes. “To go from the worst quarter to the best quarter in our company’s history was a bit of a surprise,” he adds. “The combination of some good sales to traditional customers helped but, without question, it was the spot market activity related to China that really pushed us over the top.”
“Is this a sign of a turning point where China will become a net importer rather than a net exporter?” wonders Lalonde. “The second question is, with the great use of commodities in the first and second quarters of 2009, is this just a building of stockpiles at low prices, or will this go towards consumption and be a part of an ongoing recovery? It’s the big question in all the commodities businesses. The marketplace does not know the answers yet.”
The whipsaw market has tossed met coal producers about, but there is not much to be done except to brush off the dirt and get back to work. “We will continue our traditional maintenance shutdowns but are cancelling shutdowns we had initiated in the first half of the year to control inventory,” says Payne. “Now, we are ramping up because inventory is going to be too low. My only concern is that I don’t think anybody can predict with certainty what will happen six months from now. I think we have learned that lesson in spades.”