Coal prices drop below $90

Trent Ernst, Editor 

Teck recently announced they have reached agreements with the majority of their customers for Q4 2015, based on a benchmark of US$89/tonne.

That’s down $4 from the benchmark price of the previous quarter, and $30 from the same quarter last year. These are the lowest prices in over a decade.

At the recent Coal Association of Canada conference in Vancouver, Wood Mackenzie analyst Joe Aldina predicted that supply for metallurgical coal should level with demand “by 2023”.

He predicts that prices will start “incrementally improving,” saying that Canada is the best-positioned player in the global coal market, predicting that prices could get back to US$90 by the end of 2016.

This is not good news for Northeast BC mines, which remain shuttered in the face of weak coal prices. While none of the mines have said what their target price is, both Walter and Peace River Coal idled due to low costs at prices higher than that. It isn’t until 2018 that he predicts prices will get up to $150/tonne.

The strong US dollar means that US producers are having a great deal of trouble keeping solvent (think Walter Energy), but has allowed other countries, most notably Australia, to capitalize on the market, where coal exports are still growing, in spite of a weakened market.

Queensland saw a five per cent growth in coal exports year on year, with three coal ports setting new export records, the Queensland Resources Council reported on October 15. “Queensland coal exports for the first nine months of 2015 year-to-date are running 3.5 percent ahead of last year’s record breaking figures, they wrote in a release. “The September quarter results reaffirm the resources sector as a crucial pillar of the state’s economy and place coal exports in good stead to exceed 2014 levels.”

The drop in export volume to China has been made up in other Asian countries, with Korea up eight percent, Taiwan up 21 percent, and the rest of Asia, excluding Japan, doubling their Australian imports in the past nine months.

The increase in met coal shipments from Australia in the face of falling prices is part of a battle between BHP Billiton and its competitors. BHP is the world’s largest supplier of seaborne metallurgical coal, and has been using its dominant position to crush its competition, increasing its output and forcing prices down, forcing smaller, higher cost mines to idle.

As prices fall, larger mining companies like BHP have managed to reduce their cost per tonne by reducing costs and increasing volume.

This strategy may allow companies like BHP and Canada’s Teck to weather the storm, but it also prolongs the downturn.

Last year, the company upped its production to 45 million tonnes, effectively countering any price increases caused by the idling of other mines. The company is on track to produce about 47 million tonnes this year.

But that could be changing, as their guidance estimates for 2016 have dropped to 40 million tonnes, creating some much-needed breathing space in the market and allowing the prices to start to rise towards the end of next year.

Still, people shouldn’t hold their breath for the return of mining to Tumbler Ridge any time soon. The Northeast Coal Fields has always been about the quality of the product, not about how cheaply it can be mined.

That could change with the possible underground Murray River Mine. There, much of the cost comes up front, in setting up the mine. After that, claims spokesperson Blair Lekstrom, the cost of production should be much lower.

And while HD recently received their Environmental Assessment Certificate from the BC Government, they are still waiting for Environmental Approval from the Federal Government, a process which they expect to be pushed back a few months due to the Canadian election.

They also need to get their Mines Act Permit, a process that can take, says Lekstrom, up to a year. He predicts the company won’t be in a position to make a decision about the mine until the end of next year, and, if they decide to go ahead, shouldn’t expect to see a mine in place before 2018. Which is coincidentally about the time the price of coal is expected to get above US $150/tonne.