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The Ridley bulk-handing facility for coal on Ridley Island in Prince Rupert. (JOHN LEHMANN/JOHN LEHMANN/THE GLOBE AND MAIL)
The Ridley bulk-handing facility for coal on Ridley Island in Prince Rupert. (JOHN LEHMANN/JOHN LEHMANN/THE GLOBE AND MAIL)

A cautious optimism for coal Add to ...

The sky is a hard grey and the small mountains of coal piled a dozen metres high are thick black. From this outpost in northwestern British Columbia, about 700 kilometres from Vancouver, coal trundles on conveyors from train cars to the piles, and then onward to docked ships destined for steel mills in China, Japan, and South Korea.

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New equipment – huge rings of steel – lies nearby. The gear will increase the capacity of Ridley Terminals Inc. to unload coal from trains, one step in a four-year, multimillion-dollar effort to double exports to 24-million tonnes a year, and handle new and increased production from coal mines in British Columbia, Alberta and the United States.

It is the second time Canada has bet big on higher coal exports to steel makers in Asia. Last time, the bet on Japan failed badly when the forecasted prolonged boom didn’t last. Today, the same belief, and certainty, has been attached to China, the world’s largest steel-producing nation.

China is the key customer of metallurgical coal, a vital ingredient in the making of steel used across all industries. However, demand has ebbed as China experiences a marked economic slowdown in recent months following decades of double-digit annual growth. Tightening credit has caused China’s property market to slow and its steel mills are curbing production on squeezed margins.

The mounting debt crisis across Europe and the U.S. has also fuelled concerns of a double-dip global recession, which in turn has caused the price of coal and other commodities to fall from records reached last year. Iron ore, used alongside coal to produce steel, has also seen its price fall sharply as Asian steel makers report paying lower prices for the two commodities.

“The global economy has yet to find any sort of stability and this uncertainty has carried over into steel demand,” said HSBC Securities’ Richard Hart in a recent note. “The majority of global steel mills are operating at substandard utilization rates.”

Executives at major coal and iron ore producers such as BHP Billiton Ltd. and Rio Tinto PLC have also acknowledged some Chinese buyers have had credit difficulties. While many miners can’t deny the economic picture right now is grim, most insist any lasting slowdown will be nothing like the collapse seen during the 2008-09 global financial crisis. They point to orders that are still being filled, and a steady demand for commodities even if the volume has dropped from previous highs.

The continuing construction at Ridley also helps to allay concerns about a commodities crash, as producers such as Canada’s Teck Resources Ltd. and London-based Anglo American’s Peace River Coal operations in B.C., among others, pin their growth on the planned expansion.

Ridley, a federally controlled Crown corporation, was granted the power by Ottawa last spring to borrow from capital markets to fund the $90-million expansion, which is part of a larger $300-million port expansion to further increase capacity to ship commodities such as coal to Asian markets.

Approval of the first phase of funding, which includes some provincial and federal dollars, followed long lobbying by industry intent on finding a way to get as much of its product to its crucial Chinese customers.

Vancouver-based Teck, North America’s biggest producer of metallurgical coal, signed a 2015-2024 deal with Ridley in September, largely for its plan to resurrect Quintette, one of its original mines from the 1980s, near Tumbler Ridge, B.C. The mine is expected to produce three million tonnes starting in 2013.

Ridley’s expansion would allow it to rival Canada’s No. 1 coal export terminal, Westshore, which moves more than 20 million tonnes a year from Delta, just south of Vancouver. It is Teck’s main export hub for its southeast B.C. mines, the heart of the company.

The revival of Quintette, which Teck is expected to make official this spring, will not only help boost Teck’s production by about 25 per cent to 30 million tonnes by 2014, but better compete with producers in Australia, the world’s top coking coal exporting country.

“The last two to three years we really focused on ensuring we have an adequate and in some cases excess capacity in both rail and port to support our growth plan,” of which Quintette is a key part, Teck chief executive officer Don Lindsay assured investors at a conference in December, saying the outlook is better today than a couple of months ago. “Steel production isn’t falling off a cliff … Over all, steel production has been pretty steady,” Mr. Lindsay said.

Teck’s reliance on Chinese growth is based on continuing discussions it has had with government officials, companies and investors in China, most of which have come through its relationship with 20-per-cent shareholder, China Investment Corp.

While Teck has experienced some coal shipment deferrals, the company maintains no deliveries have been cancelled and that steel production has not peaked, TD Securities analyst Greg Barnes noted after a recent meeting with Teck’s management team in Toronto.

Global steel production has also remained steady compared with the last commodities crash in 2008-09, when production at steel mills plummeted from about 80- to 90-per-cent utilization rates, to about 30 per cent, in a matter of months, Mr. Barnes said.

To support the optimistic outlook are figures showing global steel production is on track to produce about 1.5 billion tonnes of crude steel in this year, up 9 per cent from 2010, according to BMO Nesbitt Burns.

China, which accounts for approximately 44 per cent of global steel production, saw production fall 4 per cent in October, but it was 11 per cent higher in the first 10 months of the year, compared to the same period in 2010.

It’s this steady demand in China that has Teck pushing ahead with plans to expand coal production through the reopening of its Quintette by 2013. After producing coal for 18 years, Teck shut down Quintette in 2000 when coal prices bottomed out at just above $40 a tonne.

“Teck doing the right thing,” by reopening Quintette, said BMO Nesbitt Burns analyst Meredith Bandy. “It seems to make economic sense.”

That’s in part because the infrastructure is already in place at Quintette. It’s also one of the few sources of new coal production expected to come to market, and the closest to production at a time when supply is tight and disruptions can send prices skyrocketing, as they did when massive flooding struck in Western Australia a year ago.

Coal prices have also held up reasonably well, Ms. Bandy noted, and miners can still make big profits with marginal costs of production in the industry currently in the $150-to-$175 range.

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A terminal’s time

Ridley struggled immediately after it opened on June 8, 1984. New mines in the northeast of B.C. were built – and new towns such as Tumbler Ridge for the workers – and plans to double Ridley capacity were expected to follow quickly to feed then-booming Japan for decades.

It never happened. Markets weakened through the 1990s, the northeast B.C. mines shuttered, and instant towns like Tumbler Ridge became just-as-instant ghost towns. At the nadir, less than a million tonnes a year of coal passed through Ridley in the mid-2000s. The figure by 2010 had rebounded to a record seven million tonnes and this year, along with other commodities, Ridley is nearing capacity for the first time in its quarter-century-plus history.

“It had a near-death experience in the early 2000s. It’s coming raging back,” said Shaun Stevenson, vice-president of marketing and business development for the Port of Prince Rupert, whose main operation is just north of Ridley Island, a still-mostly empty site where the port plans major expansion, including a new potash terminal. (Ridley Terminals is independent from the port.)

Timing large projects for long-time demand is a difficult art. Prince Rupert, much closer to Asia than competitors such as ports in Los Angeles, opened a container terminal in 2007 to connect to the U.S. Midwest market, Chicago and environs. Then the global recession hit – but in 2011 the terminal was at about two-thirds capacity.

 
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