There is some major uncertainty right now on the seaborne metallurgical coal markets, with caution on the part of buyers and some mixed signals on 2012 demand and pricing, said Teck Resources Ltd. officials in a Feb. 9 earnings call.
Teck is by far the biggest met coal producer in western Canada and depends heavily on seaborne markets. Demand and pricing has softened lately due to something of an economic downturn. Teck said that in the U.S., steel production has actually turned up lately. And Teck is hearing from some of its customers that they’ve seen the worst of this downturn and that the second half of 2012 will be better than the first half.
Teck President and CEO Donald Lindsay said that during the fourth quarter of 2011, the company was producing at almost a 27 million tonne annualized run rate as the company has grown production recently to meet higher met coal demand. The 2012 coal production guidance is in the range of 24.5 million to 25.5 million tonnes, which would be approximately 7% to 12% higher than what was produced in 2011.
Lindsay said the fourth quarter run rate of 27 million tonnes per year was an aberration on the high side. “We’re very proud of the fourth quarter, but we’re not there yet where we could go at an annualized rate of 27 million tonnes,” he added. Actual fourth quarter production was 6.7 million tonnes, an increase of 11% year over year.
The feasibility study for the restart of the long-shut Quintette coal mine in British Columbia is proceeding with additional work revolving around water management plans. Teck expects the feasibility study in the second quarter of 2012. The mine could be in production in the latter half of 2013, ramping up to an annual rate of about 3 million tonnes per year. A key issue at Quintette is management of selenium runoff in water from the site, which is also becoming a key issue for coal producers in states like West Virginia. Teck said it is confident selenium won’t be an issue in the Quintette restart.
Teck’s Robert Bell answered an analyst question about slumping steel production lately in China, a key driver of Pacific Rim met coal markets, but still strong met coal imports into that country. “[I]mports into China of coking coal have stayed fairly steady in the final quarter,” Bell said. “We saw about 5 million tonnes of imports in December, which included a fairly significant portion of seaborne imports. There’s been a real sort of shift in production towards the coast and towards larger blast furnaces that benefit from seaborne coal. Production from the higher-quality areas within China, there’s been reports of increased production. But overall, they still require imports, and that’s why you see those numbers coming from Mongolia and also the seaborne market.”
Teck reported that its average coal price of US$253 per tonne in the fourth quarter was down from the record high prices achieved earlier in 2011, but still up 27% over the prior year. Market conditions turned downward in the third quarter and continued to weaken through the fourth quarter as uncertainty over the global economic conditions grew. By historical standards, however, prices for met coal remain relatively high. Teck has agreed on prices with its quarterly contract customers for the first quarter of 2012. Pricing of about US$235 per tonne for its highest quality product is consistent with prices reportedly achieved by competitors.
Teck is, at least in part, referring to a Jan. 5 announcement from Australian coal producer Wesfarmers, which said it has lined up most of the first quarter sales out of its Curragh mine in Queensland’s Bowen Basin. The weighted average US$FOB new contract prices of Curragh metallurgical coal (hard coking, semi-hard coking and pulverized coal injection) will decrease by about 19% as compared to the fourth quarter prices. For the hard coking coal, the average first quarter price came in at US$230 per tonne FOB Queensland.