Brazilian major mining group Vale does not expect a recovery in metallurgical coal prices this year. In its recently published 2014 Earnings Results, the group expressed the view that an oversupply in the coal market would remain this year. “Despite production cutbacks in North America and Australia, which will probably become effective throughout the year, the decrease in volumes will continue [to] be offset by new supply coming from new/expansion projects in Australia and Mozambique,” it stated. “These additional volumes are being supported by lower production costs due to depressed international oil prices and depreciated currencies in producers’ countries, compared with the US dollar.”
Last year, since April, prices for metallurgical or coking coal stayed “relatively flat”. In the fourth quarter of last year, spot prices for premium hard coking coal and coal for use in pulverised coal injection (PCI) very much stayed the same, quarter on quarter. For the premium hard coking coal, the prices were around $110/t (free on board, Australia) and for PCI coal, $89/t. Announcements of mine production halts (closures and operations being put on care and maintenance) and slowdowns by higher cost producers had no impact, owing to mine stockpiles having to be disposed of, as well as strong output from, in particular, Australian mines.
Regarding the markets, Chinese demand for imported metallurgical coal came to 62-million tons last year, which was a 17% decrease, compared with 2013. (Chinese domestic coal production also declined over the same period, by 2.5%.) “Both steel and coal demand have been weighed down by domestic overcapacity, tighter environmental regulations and a subdued property market,” affirmed the report.
In contrast, Japanese demand grew by 7% last year. Japan is once again the biggest importer of seaborne metallurgical coal. India recorded even stronger growth in 2014, estimated at 17%, compared with 2013. India is the number three importer of seaborne metallurgical coal. Vale credited the growth of the Indian market to “the renewed business and consumer confidence since the [Prime Minister Narendra] Modi government came to office”.
“From the demand side, the Chinese property market will probably remain lacklustre in 2015, weakening overall consumption growth,” forecast the group. “That said, we expect the coal price to remain weak throughout the year.”
The earnings before interest, taxes, depreciation and amortisation (Ebitda) of Vale’s coal operations came to minus $669-million last year, a deterioration of $214-million, compared with minus $455-million in 2013. The main reason was the fall in coal prices, which accounted for $199-million of the decline. Average sales prices for metallurgical coal in 2014 were $104.37/t, against $129.34/t in 2013. The amount of metallurgical coal sold by the group fell 13.9%, from 7.353-million tons in 2013 to 6.330-million tons in 2014.
Physical production fell by 100 000 t year-on-year, despite the Moatize operation, in Mozambique, setting a new production record (4.9-million tons). The drop was the result of production decreases in Vale’s Australian operations. The Integra and Isaac Plains operations were put on care and maintenance during the second and third quarters of last year respectively. And Carborough Downs saw a decline in its performance.
However, Moatize’s financial performance also deteriorated last year, with adjusted Ebitda of minus $507-million compared with minus $397-million in 2013. “The reduction of $110-million was mainly due to the softer price environment in the industry ($68-million) and [the] write-down of thermal coal inventory ($51-million year-on-year),” explained the report. “Mozambique costs, net of depreciation, totalled $555-million in 2014. Excluding the effects of higher volumes ($67-million), costs showed a reduction of $11-million when compared woth 2013.”