Canada’s coal industry has yet to recover from a drop in world demand. The result has been oversupply and a 30% fall in prices for both metallurgical and thermal coal between 1982 and 1986.
The future of Canada’s coal industry, at least in the short term, appears almost as black as the mineral itself. It’s hard to believe that, as recently as the early 1980s, the industry was strong and expected to get stronger. High oil price s were supposed to have continued, and the world’s utilities were expected to sw itch from petroleum to cheaper and more abundant coal.
Unfortunately Canada’s competitors in the international coal trade were also calling for a buoyant market. Large new mines were built in the U.S., South Afric a and Australia, as well as Canada, adding greatly to the world’s supply of coal.
“Had the world’s demand for coal kept rising, as was once expected,” the Coal Association of Canada (cac) says, “the production from these new mines could eas ily have been absorbed. However, the 1980s have witnessed two worldwide recessio ns. As a result the demand for both steel and electricity has not grown as predi cted.” And falling world oil prices have made a bad situation unexpectedly worse.
The result for Canada’s coal exporters has been reduced demand, leading to oversupply and a 30% drop in prices for both metallurgical and thermal coal between 1982 and 1986. Most Canadian coal producers are now selling coal at close to the cost of production, leaving little for capital payback and placing an ominous cloud over mining communities.
When will prices begin returning to reasonable levels? Probably not until 1990 , says Lloyd Creaser, vice- president marketing, at Cape Breton Developmemt Corp. (devco). “All indications are that there could be a 10% drop in prices for met coal in 1987,” he says. “In ’86 met coal sold between $48(US) and $50 per tonne ; now it’s expected to sell between $44 and $46.
“Something’s got to give somewhere,” he warns. “It’s becoming a case of survival of the fittest. A few years ago everyone was hellbent on total conversion fro m oil to coal. Now, with oil prices remaining low, there’s no incentive for peop le to make the conversion. They don’t expect to get a payback on such an investm ent.”
Thermal, or steam, coal markets are suffering just as much as met markets. Prices have been weakening yearly by $2-$3 per tonne, at least on long- term contr acts, and the same can be expected this year, says Giacomo Capobianco, president of Calgary- based Byron Creek Collieries, which supplies domestic and e xport thermal coal markets. (At a symposium of the cac last year, it was estimated that sales may drop to as low as $10 Canadian per tonne]).
Capobianco says companies are responding to low prices by pulling back from export markets, unless they have long-term contracts already in place. “Westar Min ing (Canada’s largest producer and exporter of met coal) is the only company agg ressively pursuing additional export sales for thermal coal,” he says. “The pric es are just too low for other companies.”
Actually global demand for thermal coal has been increasing 5%-7% yearly, Crea ser says. The rate of production, however, is increasing faster than the rate of demand; and as long as supply exceeds demand, prices can be expected to drag their feet. There’s just too much coal on the world market.
The current imbalance of supply and demand has been caused, in part, by increased production from Columbia which is striving to reach the 15-million-tonne-per -year mark. Another factor is that China is beginning to develop its coal export industry. Late last year, a $475-million(US) loan for a Chinese coal mine project was signed. The loan will finance construction of the world’s largest open-pit coal mine, to be developed in China’s Shanxi province.
Creaser adds that prices are affected most by currency exchange rates which allow some countries to dominate the marketplace. “The South African rand and the Australian dollar are both weak against the U.S. dollar,” he says. “Those two co untries can continue to lower the price of coal in U.S. dollars and take advanta ge of it in the marketplace.” In other words, South Africa and Australia can com pete at a very low U.S. dollar but still enjoy a healthy return in terms of thei r own currency.
Conversely the high value of the yen against the U.S. dollar is seriously affecting Japan’s coal industry. With the 40% rise of the yen against the U.S. dolla r in the last year (the result of an agreement to help the U.S. reduce its trade deficit), coal mined in Japan now costs three times as much as imported. Alread , steel companies have cancelled contracts with the country’s mining companies. Responding to this, the Coal and Mining Council has recommended that eight of the 11 mines producing in Japan be closed by 1991 and that the country’ s annual c oal production target be cut in half to nine million tonnes from 18 million tonnes.
The decline in demand for coal has been triggered largely by a decline in the demand for steel itself. Contributing to this has been the downsizing of automobiles, the use of steel substitutes in manufacturing and construction and the de velopment of lighter, longer-lasting substances. In addition, two major improvem ents in the steel-making process — continuous casting and the refinement of bla st furnace operations — have directly reduced the amount of met coal gobbled up by industry.
In spite of all these bad omens, the cac remains somewhat optimistic. Oil prices aren’t expected to remain low in the long term, the association says, and the growing demand for thermal coal is expected to continue, which could start price levels returning to normal. Furthermore, programs for changing to oil from coa l-firing will probably be short-lived at best. While Canadian exports haven’t be en growing steadily, this country is nevertheless expected to remain an importan t competitor in the world trade of thermal coal. Exports climbed to about 4 1/2 tonnes last year from practically nil in 1976. If this growth continues in the long term, Canada will remain a strong competitor in the Pacific Rim and other world markets.
The Northern Miner Magazine has once again asked Canada’s coal mining companies to compile annual roundups on their operations. These submissions appear on th e following pages. Although we received reports from seven of the 11 companies i n Canada, three of the largest (Manalta Coal, Westar and Luscar Ltd.) chose not to contribute. As Manalta said in a letter: “We have reviewed our 1986 submissio n and note that very little has changed in terms of our mining activity or gener al outlook. For this reason, we believe a similar submission this year would be of limited value to your readers.” For a capsule overview of the Canadian coal industry see “Coal: Oversupply and Lower Prices” in the November, 1986, issue.
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