COAL, URANIUM & OIL SANDS — Producers run hard to keep running

Canadian coal producers are no strangers to tough markets, but recent weakness in the global economy has brought about a new set of competitive challenges and left some struggling for survival.

As volume and price cutbacks by the Japanese steel mills (JSM) kick in, more pressure is being placed upon western Canadian coal producers to shift surplus tonnage on to the international marketplace. Strong marketing and sales teams will be critical to gaining international customers, experts say, whereas cost and operating efficiencies gained at the back-end will determine whether a company is able to compete with other international producers also hurt by JSM cutbacks.

Some producers, such as Fording Coal, a wholly owned subsidiary of Canadian Pacific Ltd., have diversified. Fording made the transition in the early 1980s, when its dependency on JSM began dropping to 26% from 78%. At the same time, its European marketing efforts have grown to 40% in 1998 from a mere 9% in the early 1980s.

While head starts help, no one is seen to be insulated from the market volatility. Canadian companies can expect intense spot-market bidding (1998 was already tough), soaring air-mile points to find new customers, and a fight to hold those they have. As the JSM talks have shown, international coal contracts are not diamond-solid.

However, not all is doom and gloom for Canadian producers. They go into the market with some strong advantages. While the average world price of metallurgical coal dropped by 18% as a result of the Japanese steel mills’ having moved it to a historical low of US$41.45 per tonne, compared with the previous low of US$44 in 1987, there is some room to manoeuvre.

Victoria-based Peter Kittridge of AEC Resources Consultants, which is preparing a world analysis of coal with a Canadian component, says the downward-spiraling Canadian dollar has offset some of the US$9-per-tonne loss the companies are facing in today’s market. In real terms (converting last year’s U.S. price per tonne at an average 72 cents Canadian dollar exchange rate and comparing this year’s price at a 66 cents Canadian dollar), the loss is only $7 Canadian.

“One third of that [$7 loss] is absorbed by the rail lines,” says Kittridge, though in the case of the Quintette mine near Tumbler Ridge, B.C., in which Teck (tek-t) has a 45% interest, the figure is more like 27%.

Fortunately, the current Asian crash is not the first time Canadians have had to deal with market adversity. Faced with stiff Aussie competition in the past, Canadian operators have slimmed down their operations and made huge productivity gains over the past decade.

“Just looking at price doesn’t tell the whole story,” says Alan Johnson of the Canadian Coal Association (CAC), who points out that productivity has risen dramatically to 8,200 tonnes per employee in 1997 from 2,800 tonnes in 1983. Canadian operations are renowned for their international competitiveness, though some producers now admit they have pushed the productivity envelope about as far as it can go.

Kittridge says the US$41 bid (a benchmark for other bidders) is about $62 Canadian. When one-third is peeled away for rails and port charges, that’s still roughly $40 Canadian. A graph prepared by Kittridge’s company for 1998 shows that most mines in western Canada had operating costs below that level. On the low end, Coal Mountain’s was $23.73 Canadian per tonne to rail, whereas Bullmoose reported costs of $33.40 Canadian. By the time coal reached port, those figures had grown to $44.23 and $63.04 Canadian, respectively.

The bad news for Canadian producers, though, is that while these are premium prices and profit markets, international markets tend to pay a lower price than that set by the JSM.

“Spot prices are even lower,” says Kittridge, adding that last year they dropped to a low of US$34 in Europe.

On the plus side, Western Canada has some of the best coking coal in the world, and even though producers are using more soft coal, this has only underscored the need for coal with high coke strength reactive (CRS) values.

“Some Canadian operators have prime coking coal with CRS values, but, they have not really received recognition, price-wise, for it,” says Kittridge. It is a selling point that the Australians have been able to capitalize on to receive their world prices. CRS values go from zero to 80. Anything above 65 is desirable on the world market. The Australian mines are about 70 or more, while Canadian operators range from 65 to the mid-70s.

Looking ahead, Canadian coal producers aren’t seeing much light at the end of the tunnel. Currently, half the world is in a recession, in contrast to the strong U.S. economy which is driving up the greenback. And a declining U.S. dollar would narrow the window of opportunity for Canadian product on the international market. The good news is, there is no sign of that happening yet.