Coal news and updates

Teck’s Cuts Won’t Fire Up Coal Prices

The coking coal face just cracked.

But it will take more than Teck Resources ’ temporary shutdown at six Canadian mines to fix what ails the global market for coal used to make steel.

Coking coal, like fellow steel ingredient iron ore, faces chronic oversupply. A few years ago, coking coal sold for more than $300 a metric ton on a combination of strong Chinese demand and floods in the world’s biggest source of exports, Australia. Today, it languishes at less than $100.

Teck, the world’s second-largest coking coal exporter after Australia’s BHP Billiton, had until now talked more about cost-cutting as a way to whether the storm. Speaking at a conference earlier this month, Chief Executive Don Lindsay said more cutbacks in capacity were needed, implying perhaps 4 million to 9 million metric tons—but didn’t indicate Teck would be the one stepping up to the plate.

Now, Teck’s shutdown will cut 1.5 million tons in the third quarter, though further cuts could come later this year.

So what has changed? Daniel Scott at Cowen says reports BHP was offering June contracts for coking coal at $89 a metric ton—$20 less than the prevailing benchmark contract—may have been one factor, taking pricing down toward a break-even level for Teck.

The size of the drop also negates the support Teck had gotten from a weakened Canadian dollar. While average spot prices had fallen by 5% in U.S. dollar terms in the first quarter versus 2014’s fourth quarter, they had risen in Canadian dollar terms. But the loonie can’t keep pace with the latest move.

While this is an important psychological moment for the struggling coking-coal industry, it isn’t enough. For one reason, Teck is maintaining sales levels in the third quarter, suggesting it will sell inventory to make up the shortfall. And the level of surplus supply is staggering: Citigroup foresees an excess of 38 million metric tons as far out as 2020 on a mixture of weak demand and some new projects coming online that offset some closures.

Teck’s crack will need to be followed by an industry landslide to really stabilize prices.

source: http://www.wsj.com