Sept/Oct 2010

The two faces of coal

Uncertainty the common prospect for metallurgical and thermal coal

By Dan Zlotnikov

At first blush, thermal and metallurgical coal are easy to lump together. While the methods used in producing the two are essentially the same, when the time comes to sell them one is destined to cross the world; the other is often consumed just a short hop from where it was mined.

Thermal coal is, as the name suggests, mainly valued for its heat-generating capability and used as a fuel in power plants. Alec Kodatsky, a commodities analyst with CIBC, explains that because for the most part thermal coal is a low-price product, shipping costs comprise a major part of the final price. “In Canada, the bulk of thermal coal mined is literally shipped across the street and put directly in a power plant,” he says, describing what are known as “mine-mouth” operations. That said, there have recently been indications that Canada’s export market for thermal coal is on the upswing.

Genesee MineMetallurgical coal, on the other hand, is a must-have for steelmakers the world over. Because steel producers are prepared to pay a much higher price for their coal — and because metallurgical coal is far less abundant — this type of product frequently travels halfway around the globe on its way from mine to blast furnace.

The factors influencing the price of these two coals are also quite different. Mine-mouth operations are essentially a symbiosis between mine and power plant; transportation cost and low unit price of most thermal coals keep the two tied to each other. The main source of price fluctuation for the operator of a mine-mouth coal mine instead comes from the customers of the power plant.

“Thermal coal tends to be energy related as far as the overall level of pricing, and that’s of course probably much more closely linked to oil prices,” Kodatsky explains.

Mark Plamondon, senior vice-president of Sherritt Coal, agrees, explaining that “coal-fired power plants typically provide low-cost base-load electricity, which remains relatively stable during economic cycles.” As a result, he adds, production from Sherritt Coal’s Prairie operations has remained steady during the economic crisis.

Things can be much more volatile when it comes to metallurgical coal, demand for which is directly related to the demand for steel products. The two primary uses of steel — construction and the automotive industry — are in turn very sensitive to the state of the overall economy. If the economy grows faster, so does the demand for steel and the price offered for coking coal. A slowdown in the economy? Metallurgical coal producers are sure to start looking worried.

This story played out to dramatic effect over the past 18 months. The global credit crisis brought economic growth the world over to a grinding halt, and steel producers saw demand for their products plummet. Metallurgical coal producers soon felt the pinch, as demand dropped off sharply and spot prices dropped from $250 to $300 per tonne to below $130 per tonne. To put the figure in perspective, multinational mining giant Teck described 2009 in its annual report as “the worst year for the global steel industry in over 70 years.”

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