November 2014

Coal producers focus on cost cutting and new markets

Rising demand from China and India likely to increase prices by 2020s

By Christopher Pollon

Forget the doldrums of 2014. If Wood Mackenzie’s Joe Aldina is right, the currently brutal metallurgical (met) coal market will seem like ancient history by 2025, when he predicts the Australian benchmark hard coking coal price will exceed US$220 per tonne. By that time, Canadian producers will be expanding production to feed growing demand stoked in places like India, the emerging Asian powerhouse.

“Canada is actually the best positioned player in the market,” said ­Aldina, a New York-based coal cost analyst who travelled to Vancouver in September to present this forecast to the Coal Association of Canada’s 2014 Conference.

Held over three days, the mood at the event was downbeat as met and thermal coal miners, producers and buyers commiserated about the market downturn. Aldina’s forecast for met coal was one of the meeting highlights, shining a positive light on the future.

Met coal was at about $120 in September and will continue to struggle right through to 2018, when Wood Mackenzie expects prices to begin to pick up, rising above the $150 mark; it also predicts it will take well into the 2020s before prices enter the $200 range. Aldina said he believes a combination of rising demand (underpinned by hot metal growth in China) through the end of this decade, followed by a pick-up in steel demand in India, plus additional mine idlings, will spur this longer-term increase.

Aldina and other market watchers like session moderator (and McCloskey Group namesake) Gerard McCloskey made clear that current met coal prices are not the result of flagging demand. Global markets for met and thermal coal have been flooded by countries like Australia and Indonesia respectively, and it will take years for this oversupply situation to change. “In the short term, to see higher prices, we need to see even more idlings or shutdowns,” said Aldina. He estimates that it will not be until 2018 when numerous active mines, particularly in Australia, will deplete their reserve bases and need to be replaced with higher-cost projects.

Alpha Natural Resources president Paul Vining was credited with the most poetic explanation for the oversupply predicament: “We’ve seen the enemy, and it is us, the suppliers.”

At current prices it is not economical for many to dig met coal out of the ground. Australian and Canadian producers have the most assets currently “above water” on the margin curve thanks to their high-quality met coal deposits, most of which can be mined from the surface, while the United States is faring especially poorly. Réal Foley, vice-president of marketing at Teck, estimated in his presentation that about one-third of the hard coking coal industry is currently uneconomical due to “unsustainable prices.”

How are met coal producers adapting to such conditions? Over the last few years, they have embarked on a highly successful cost-cutting spree – costs for global seaborne market met coal were down 12 per cent in 2013 and nearly 10 per cent this year, according to Aldina. The cost cutting has been so thorough and efficient that oversupply has been further exacerbated by cut-savvy producers who have avoided suspending mining operations.

The complexities of cutting production to correct oversupply was apparent when Kobe Steel’s Hiroshi Tanaka, general manager for purchasing, expressed the concern that suspending met coal mine expansions and new greenfields threatens to disrupt the stability of supply, upon which large-buying met coal countries like Japan rely. Once the prices for met coal come back, the risk is real that there will not be enough supply to feed steelmakers.

Teck is an example of a company that has not been timid about cutting costs or putting the brakes on met coal mine expansions. In his presentation, Foley outlined the company’s strategy that today sees its met coal production well under capacity. And with nearly seven billion tonnes of coal in long-term reserves and resources (more than 90 per cent of this is hard coking coal), the company anticipates it will be selling met coal to the vast majority of global steelmakers for the next 100 years. (At the current prices, they are in no hurry to dig all of that coal out of the ground).

A shifting of the tides was apparent when Foley announced the start of a strategic pivot away from China, something unthinkable even a few years ago when China’s economy seemed like it would forever surge.

Foley noted that China had already dropped to about 25 per cent of Teck’s total met coal sales in 2013 from 30 per cent the year before. Even this year, Teck has seen market areas outside of China – including Japan, Korea, Taiwan, and India – grow at a higher rate than China, something Foley expects will continue. “The key growth area we see in the future out from 2018 is India.”

Canadian iron ore producers see potential for a bright future amidst dark present

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