Wood Mackenzie goes long on met coal

Joe Aldina, principal research analyst for metal and energy consultant Wood Mackenzie, says that supply for metallurgical coal should level with demand by 2023, and although he expects met coal prices will rise, global producers “are not out of the woods yet.”

“Our forecast is not for prices to jump — we don’t see those catalysts — but we see them incrementally improving,” he said during a September presentation at the annual Coal Association of Canada conference in Vancouver. 

Aldina predicts that met coal could bounce back to US$90 per tonne by the end of next year, and over US$100 per tonne in 2017. But with current benchmark prices near US$90 per tonne, he said that U.S. producers are “overwhelmingly most at risk” for being in the red.

“They’ve just been crushed by the strength of their dollar,” he added, predicting that 11 million tonnes could drop out of the country’s exports this year from production cuts.

But the strengthening U.S. dollar has given other exporters a competitive advantage. Aldina predicts Russia will increase its met coal exports to 22 million tonnes this year, although rising domestic prices and swinging exchange rates could slow momentum.

“Russia is moving more PCI coal into the market, which is the lowest-quality material you’d put in a blast furnace,” he said. “But they’re losing their currency edge, and even though we think that Russian exports will grow incrementally, it won’t be as fast as we first thought.”

Global met coal prices maxed out at US$330 per tonne in 2012, but retreated to the low US$80 range this year — driven by a saturated market. 

Adding to the oversupply woes, China has cut 20 million tonnes from imports this year, turning to domestic production rather than overseas sellers.  

“China dwarfs everyone — it’s the world’s second-biggest economy and the biggest coal market, which is why we have to pay attention to what they do,” he said. “Their stockpiles are bursting, so there’s less need at the moment, which is pushing down demand and prices.”

With lower seaborne demand from China, top coal producer BHP Billiton could send its product elsewhere.  

“BHP has been one of the most aggressive players at increasing exports of met coal, and is credited with contributing to the oversupply in the industry,” Aldina said. “They have one of the best high-quality coals and best costs, so combined with decreasing freight rates, we’re seeing their coal pop up internationally, where they haven’t been competitive before — and that is taking business away from other players.”

BHP announced it would cut 3 million tonnes of met coal production next year, and Aldina predicts that overall production in Australia will cap off at current levels.

Other companies could also align production and inventories with market conditions, with over 38 million tonnes of production cuts scheduled this year, Aldina says. 

Canada’s top met coal producer Teck Resources shed 1.5 million tonnes off its production by introducing three-week closures across its five operations in B.C. and one in Alberta.

The company has also shaved cash costs by 15% — down to $45 per tonne — according to a second-quarter report, with 25 to 26 million tonnes of met coal production this year.

“When you look around the world at coal exporters, especially outside of Australia, I think everyone should be proud of Teck and where Canada sits in this market.” Aldina said. “We think Teck is a competitive player, if not the most competitive player outside of Australia, and a few mines in Russia.”

Despite drops in global production, there’s still a large supply overhang in the market. Aldina says that even the growing market in India — which could import 3 million tonnes this year — isn’t enough to “trim the fat,” although the country’s growth represents a “bright spot” for the coal industry. 

“India has to rely almost entirely on imports to satisfy its needs,” he said. “If you give India time to grow, we forecast their demand to increase to 120 million tonnes by 2030, and they’ll overtake China as a met coal importer sometime in the mid-2020s. So we do see things getting better — it just takes a little time.”

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BC COAL FACTS

Coal resources

• B.C. has 12.9 billion tonnes of potentially mineable coal resources, with 8 billion tonnes located in the East Kootenay coalfields in southeast B.C., and 4.9 billion tonnes in the Peace River coalfield in northeast B.C.

• B.C. has 10 permitted coal mines in the northeast (Peace River area) and the southeast (Kootenay area), and Vancouver Island.

• When in operation, nine of these mines produce metallurgical coal for making steel, while one mine on Vancouver Island produces thermal coal.

Economic and social impacts

• B.C.’s coal-mining industry contributes $3.2 billion in value-added GDP to the provincial economy.

• In 2011, the value of provincial coal production reached $5.7 billion.

• Total tax payments made by the coal mining industry to all levels of government in 2011 was $715.2 million — this includes $399 million in tax revenue generated by economic activity and $316.2 million in mineral taxes paid to the B.C. government. 

Production and exports  

• In 2012, B.C.’s 10 operating mines produced 28.8 million tonnes of coal.

• Export sales for metallurgical and thermal coal were $7.1 billion in 2011, representing 22% of total exports from B.C.

• Canada is the third-largest exporter of metallurgical coal after Australia and the U.S., and 89% of Canadian metallurgical coal comes from B.C.

• Coal exports are a major contributor to B.C.’s export activity, making up 21.8% of total provincial exports in 2011.

• Japan and South Korea consumed the largest share of B.C.’s total metallurgical coal exports, but China’s demand for B.C. coal has been on the rise.

Source: Coal Association of Canada