Vancouver — It's a seller's dream and a buyer's nightmare on the global coal scene, as producers scramble to increase their output to meet surging demand that shows no signs of softening.
In the latest sign of the coal boom, Vancouver-based Western Canadian Coal Corp. yesterday announced that it had reached deals to sell its 2005 production to Asian steel mills for more than $100 (U.S.) a tonne — more than double last year's going price.
And in a bid to capitalize on the hot demand, the Vancouver-based company has also asked the provincial government for permission to boost production at its Dillon mine to 80,000 tonnes a month from about 60,000 tonnes, which would exhaust the deposit in two years instead of six, as originally planned.
By that time, however, Western hopes to have permits to exploit the nearby Brule deposit, a key part of its plan to produce five million tonnes a year of coal by 2009.
Companies across the industry are rushing to take advantage of strong prices that analysts expect will hold up for at least 12 months.
“At this time, we would expect similar pricing next year, based on strong demand,” one analyst said.
“Over the next 12 months, there is not enough new supply to meet demand,” continued Haytham Hodaly, an analyst with Salman Partners Inc. in Vancouver. “Over time, there will be additional supply and some of the queues at loading facilities will slowly die down, but that's going to take some time.”
Western produces pulverized coal injection, or PCI, coal used in steel making. The hefty price increases the company has obtained mirror these previously announced by producers of metallurgical or coking coal, also used in steel making.
Prices for PCI and coking coal have soared this year on strong demand, particularly from Asian steel manufacturers.
Prices for iron ore, also used in making steel, have posted similar gains.
Bottlenecks at ports in Australia, a big producer of both commodities, have aggravated the price squeeze.
“We do expect the coking coal supply situation to improve,” said Greg Barnes, an analyst with Canaccord Capital Corp. in Toronto. “But there are definitely infrastructure problems and those are not going to go away in a hurry.”
BHP Billiton is the world's biggest producer of metallurgical coal, accounting for about 30 per cent of global supply.
Calgary's Elk Valley Coal Corp., owned jointly by Fording Coal Trust and Teck Cominco Ltd., is the second-biggest player in the coking coal field, providing an estimated 21 per cent of global supplies.
In February, Fording Coal Trust announced that Elk Valley Coal had negotiated prices averaging $122 a tonne for the 2005 coal year, compared with an average $52 a tonne for 2004.
Elk Valley Coal operates five mines in British Columbia and one in Alberta. The partnership is increasing its production by about 12 per cent this year in response to strong demand.
Most coal is sold through long-term contracts with prices negotiated annually for a “coal year” that begins April 1.
Surging coal prices have created an opening for smaller producers such as Western, which shipped its first load of coal late last year.
The response from customers, especially Asian steel mills, has been strong enough to warrant faster growth, said Western chief executive officer Gary Livingstone.
“The Dillon mine was an ideal opportunity to put in 20,000 or 50,000 tonnes to various customers,” he said. “But they're not interested in that in the long term. They're interested in 100,000 or 300,000 tonnes.
“That's why Dillon is such a great fit to lead us into the Brule — because when the Brule is up and running, we have a ready-made customer base that is lining up to take the coal.”
Calgary-based Grande Cache Coal Corp. announced in December that it had completed negotiations for more than two-thirds of its planned production for the 2005 coal year at an average price of $125 a tonne.
Grande Cache has agreed to ship about 1.3 million tonnes of hard coking coal to South Korean steel-maker Posco and a group of Japanese deal makers.
Vancouver-based Pine Valley Mining Corp. is also stepping up production plans.
The company has asked the province for permission to bump up production at its Willow Creek Mine from a currently permitted 900,000 tonnes a year to 2.2 million tonnes a year.
© The Globe and Mail
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