Coal sales soften for Elk Valley

Vancouver — Prices and demand for coal have softened in recent months, putting a damper on the projected financial performance of Fording Canadian Coal Trust (FDG.UN-T, FDG-N).

The open-ended mutual fund’s core asset is a 60% interest in the Elk Valley Coal Partnership, the world’s second-largest exporter of metallurgical coal from mines in Western Canada.

Industry wide, average coal prices negotiated for the 2006 coal-year (starting April 1) fell by about 10% from the US$122-per-tonne level a year earlier. With 80% of contracts in hand, the average price for Elk Valley’s 2006 coal-year is forecast to be US$109 per tonne. This brings the weighted average price of 2006 calendar-year coal sales to about US$113 per tonne, up from US$99 per tonne in calendar 2005.

High inventory levels at steel mills and reduced steel production also led to the deferral of shipments to some customers. As a result, Elk Valley’s first-quarter sales volumes will likely be lower than forecast.

Overall, 2006 sales were forecast to be between 22 and 25 million tonnes, depending on the global demand for steel. A global oversupply of steel could result in a 10% reduction in coal shipments, Fording cautions, and push sales down to the low end of the range. If this proves to be the case, Elk Valley Coal “would have to take steps to reduce coal production,” which could lead to higher unit costs, as fixed costs would be spread over lower volumes.

Production costs increased in late 2005, and are expected to remain high through 2006, because of higher costs for equipment and labour. Rail rates could fall, with less production going to overseas markets.

Fording announced a first-quarter cash distribution of $1.40 per unit, which reflects estimated first-quarter sales and higher 2005 coal-year prices. Future distributions will depend on sales volumes and will reflect the lower 2006 coal- year prices.