In the Teck Resources coal business, production in the third quarter was 6.3 million tonnes while sales came in at 5.5 million tonnes as customers grew cautious during the quarter.
The average realized price for the quarter was US$193 per tonne, about a 14% discount to the benchmark price of US$225/tonne for the premium brands of coal, noted Teck CEO and President Don Lindsay during an Oct. 24 earnings call. Usually, on average, the realized price is about a 10% discount to the benchmark price due to the mix of products that Teck has, including some lower value pulverized coal injection (PCI) and thermal coals.
“It is important to remember that the discount is larger when the quarter-over-quarter benchmark price increases, as it did in Q3, as lower-priced carryover tonnes are brought forward,” he added. “Third quarter unit sale cost were at C$77 per tonne, and distribution costs came in at C$37 per tonne for a combined costs of C$114 per tonne. The increased costs compared to last year were mainly due to the new labor agreements effective at all mines, also to onetime labor settlement charge and higher ports and ocean freight rates. We do expect our costs for the year to be within our guidance of C$72 to C$78 per tonne.”
During the third quarter, a decision to adjust production was implemented in mid-August to better align with customer demand as steel producers remained cautious. Teck currently expects to come in at the low end of it production guidance range for the year.
In terms of sales for the third quarter, Teck’s highest quality coals achieved pricing of US$170 per tonne which is in line with prices reported by competitors. At this point, Teck has contracted sales for about 6.2 million tonnes to be delivered in the fourth quarter, at an average price of US$163 per tonne. “The market has certainly improved from the low point in August with improved steel production, and this is being reflected in sales volumes and spot pricing,” Lindsay noted.
Ian Kilgour, Senior Vice President of Coal for Teck, answered an analyst question about coal production plans going forward. He said that next year’s production will depend on what actually happens in the market. “We are hoping that the positive signs that you’re hearing now will follow through and that we’ll be able to utilize the full capacity that we have installed in our coal business,” he said. “Our expansion of our Elk Valley assets, the brownfield expansion is virtually complete and we have the capacity to increase our production and we will do so as the market demands.”
Quintette still in Teck plans in any reasonable coal market
Kilgour also addressed plans for the restart of the long-shut Quintette strip mine in British Columbia, with a targeted capacity of 3.5 million clean tonnes per year. “Well, Quintette is part of our long-term philosophy which is that we see that the market for coke and coal is going to be a very strong one in the future as China’s requirement for imported coke and coal increases, as India’s requirement for imported coke and coal increases,” he said.
First coal production at Quintette would be in the first quarter of 2014, Kilgour added. “As we’ve seen, with increasing costs of production across the world, that the cost curve is increasing, Quintette is coming in at operating costs very similar to what we have in our Elk Valley coal mines, so that we see that there is room for Quintette in the global scene and we know that it’s a desirable product. We have many customers who were receiving Quintette coal before the mine shut down and will be very happy to receive it in the future.”
Ronald Millos, Teck CFO and Senior Vice President of Finance, answered a question about whether the current slack market is impacting the Quintette restart. “The decisions that we make are all long-term, and yes, it’s a weak quarter last quarter and this quarter, but we don’t anticipate it staying this way at all,” he said. “And in fact, if you look at the four major coke and coal producer regions in the world, meaning Canada, the U.S., Australia and Shanxi province [in China], at each of the U.S., Australia and Shanxi province, the costs are going up quite dramatically where we have been able to hold our costs relatively stable. [I]f you look forward, we’ll be in an even better position next year and the year after compared to those regions.”
Smaller coal market means coal prices fall faster than iron ore prices
Another question had to do with why met coal prices are tumbling faster than prices for iron ore, with met coal that is baked into coke the means of turning that iron ore into steel. Lindsay said for one thing, the coal market is a lot smaller than the iron ore market.
“And it’s a primarily seaborne market, coastal plants, so there aren’t that many customers in the world,” he added. “And so when markets turn down, they can all spot it and kind of act in concert and go into destocking phase pretty quickly. When you combine that with a large supplier, and in fact, the world’s largest [coal] supplier, that had been constrained from the flood back in 2011, and rotating strikes and all of a sudden, they’re dried out and the strikes are over and they have supply quite quickly that they haven’t placed with customers and they can’t keep it, there’s only so much room to store coal and if you store it too long, it can lose some of its qualities, so they have to sell. So a situation like that can have a quickened effect in a small market. But it is only for a certain period of time and then you see suppliers respond to price, and we’ve seen a total of 25 million tonnes, I’ll get one of my colleagues to confirm that number in a minute, of production that has been announced as shutting down, but more than that, and this is what gets us quite excited, is that as you’ve seen the cost structure, particularly in Australia, rise so significantly, up 60% in the not too distant past, that gives them pause for thought when it comes to investing in new capacity and we’ve seen some strong statements from the large players there, that they will not be going forward with their expansions whether there’s port or rail capacity available or not because it’s not very economic.”
Lindsay continued on the subject of the tumble over the last couple of years in met coal prices, which are denominated in U.S. dollars. “So we acknowledge it, it’s been weak, but the market is correcting and correcting pretty quickly,” he said. “The next comment I want to make is on the $170 versus the $330 [per tonne]. The $330 was during a period of time when there were floods in Queensland and production was dramatically constrained. So while it is a significant drop, it’s a drop from an elevated level due to nature. So we don’t think of 330 as a long-term price. But having said that, seeing $170, we are very encouraged that turns out to be the low, and so far, that’s what it looks like, but you never know. If that turns out to be the low, then that suggests that the long-term price is going to start with $200, and not $200 flat but something above that. And that benchmark $170 was negotiated when the spot price was $140, which speaks to the question [from] earlier that the spot price is not necessarily representative of a long-term negotiated price between customers and suppliers that have a long-term relationship.”
Lindsay said he thinks the customers know that if prices stay this low, even more tonnes of production would be shut down and then they’d be stuck next year paying $275. “So I think the supply and demand negotiation is pretty reflective of the realities of the market,” he added. “Then looking backwards, you mentioned the benchmark of $129, I recall in the fall of 2008 and early 2009, that there were a number of analysts that jumped on the bandwagon and said the long-term price for coal was going to be $75 and they were looking at cost curves and the rest. And of course, the lowest it ever got was $129.”
And yet, he added, the new low benchmark would appear to be $170, up $40 from $129 low of a few years ago and $100 higher than what analysts thought it would be just four years ago. “So we’ve seen quite a structural shift in the industry, it looks to us that the long-term prices are over $200, our costs are about $110, and so that looks like a pretty healthy business. We are very pleased that we’ve taken the steps we have in terms of expanding the business and we’re going to carry on with that, it’s working very well, we’ve been very pleased with our operating results and we look forward to being able to make decisions on Quintette. I’m sorry I stayed longer than I thought, I get quite passionate about my business.”
Lindsay noted that Teck has looked into getting into the iron ore production business and still has an eye on that over the long term, but with no immediate plans to take that plunge.
Teck is the largest producer of steelmaking coal in North America, and the second largest exporter of seaborne steelmaking coal in the world. Its active mines in British Columbia and Alberta are Cardinal River, Coal Mountain, Elkview, Fording River, Greenhills and Line Creek. Headquartered in Vancouver, Canada, its shares are listed on the Toronto Stock Exchange under the symbols TCK.A and TCK.B and the New York Stock Exchange under the symbol TCK.