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TORONTO – Steelmaking coal producers have started to slash production in response to lower prices, but Teck Resources Ltd. is warning that a lot more supply needs to be cut by high-cost rivals to bring the market into balance.
“Prices are currently at their lowest level since 2007, and margins are at their lowest level in 10 years,” chief executive Don Lindsay said on a conference call Tuesday. “We continue to be surprised there remains so much uneconomic coal supply on the market.”
Vancouver-based Teck announced on Tuesday that it will cut roughly 600 jobs as it tries to reduce costs and adapt to lower commodity prices, particularly for coal. The company’s realized coal price in the first quarter was US$131 a tonne; by comparison, Teck sold its steelmaking (or coking) coal for an average of US$257 a tonne in 2011.
The market has gotten even worse in recent weeks. The benchmark price for the second quarter is just US$120 a tonne, while spot prices have flirted with US$100.
Prices are falling because of concerns about rising production, slowing growth in China and the fact the Chinese government is closing some the country’s dirtiest steel mills to reduce air pollution. As well, the market has not faced any major supply disruptions, which were a frequent occurrence in the last decade.
The biggest source of new coking coal supply is Australia. Mr. Lindsay noted there is a huge fight going on in that country as miners try to boost output to seize market share. That is weighing on prices.
“They’ve taken the approach of significantly ramping up [production] in order to help reduce their costs. And in doing so, of course, they reduce the revenue per tonne more than their costs,” he said.
Teck believes that 35 million to 40 million tonnes of current seaborne coking coal output is losing money at current prices. That means production curtailments are inevitable, but the company is frustrated at how long it is taking for them to materialize.
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