Joe Aldina, principal analyst for Coal Research, Wood Mackenzie — Photo courtesy Joe Aldina With the U.S. dollar on a tear, hitting valuations agains
Joe Aldina, principal analyst for Coal Research, Wood Mackenzie — Photo courtesy Joe Aldina
With the U.S. dollar on a tear, hitting valuations against the Canadian dollar and other currencies that haven’t been seen in more than a decade, commodities and precious metals priced in U.S. dollars have been taking a beating. Coal, one of Canada’s largest exports, is no exception, and the low prices are hitting Canadian coal producers hard.
Each year, Canada produces over 60 million tonnes of coal, split roughly in half between thermal coal, which is used to fuel power plants, and metallurgical coal, which is used to manufacture steel. While Canada consumes most of its thermal coal domestically, virtually all of its metallurgical coal is exported. This makes Canada a key player in the worldwide coal market, contributing over 10 per cent of the global supply. However, with the price of metallurgical coal down 70 per cent over the past four years, it’s getting harder and harder for Canadian coal producers to compete.
Even Teck Resources Ltd., Canada’s top coal producer and, at the moment, the country’s only producer of metallurgical coal, is feeling the strain. In May 2015, Teck announced it would suspend production in six of its Western Canadian mines for one week in July, August and September, respectively. This move came after the company cut its dividend and slashed 600 jobs, and it warns more cost-cutting measures could be on the horizon.
Despite the strain, Joe Aldina, who analyzes the global coal market for the NYC-based industry analytics company Wood Mackenzie, said Teck is actually weathering the storm better than most, thanks to its lower than average operating costs.
“Teck is one of the better positioned companies in the global market," Aldina said. "They have weighted average cash costs that look like the company is still doing OK, breaking even or making a small margin on their assets. It was a little surprising to see them cut some production, but it shows you how difficult the market is, even for Teck.”
Aldina said that shutdowns are typically regarded as a method of last resort, because producers have fixed costs—infrastructure, staff and debts—that require a continual cash flow. Cost-cutting measures, such as layoffs and improving efficiency, have been the main weapons Canadian producers have used to stay afloat over the past several years, but Aldina said such measures have reached their limit. “Producers have been very artful in reducing their costs, but I think this cycle has come to an end. There aren’t any easy cost reductions left. Shutdowns could be the key to getting rid of oversupply and cause prices to rebound.”
As Aldina noted, apart from the strong U.S. dollar, another major factor putting pressure on coal prices is reduction in demand, especially in China, which represents 50 per cent of the world’s steel-making capacity. Currently, the global industry is facing a surplus somewhere between 15 and 20 million tonnes of coal. Temporary shutdowns like the ones Teck has implemented will help to work off some of that surplus, roughly 10 per cent, but Aldina said it will take a lot more than that to turn prices around.
One potential game-changer is India, another major steel producer. “We’re expecting Indian metallurgical coal imports to tick up by four to five million tonnes this year,” Aldina sid. This increase is due to three new coke batteries that are coming online in India this year. “So there are some concrete increases in demand in India even in the short term. But China’s imports are dropping faster than India can pick up the ball, so to speak, so we’re probably going to have another year of difficult conditions for most players in the market.”
Despite the somewhat gloomy predictions, Aldina says Teck and Canadian coal producers in general are actually doing quite well compared to their global counterparts, and he sees them emerging into a much better place in a few years. “I guess the message is 'hang on.' We are in the bottom of a cycle, and we do expect it to turn around at some point. But we’re talking years, not months. It’s going to be a slow process, because we don’t see a lot of demand catalysts, so it’s going to be reduction in supply that causes the rebound. When that happens, Canada will be well positioned, and margins and prices should increase.”
