As cyclone Yasi bore down on Australia’s Queensland region last week, North American coal producers scrambled to extract more value out of one of the tightest coal markets in recent memory.
The region, which has been battered by a series of horrific storms in recent weeks, is the world’s largest exporter of coking coal used to make steel.
As mines, railways and ports struggled with reduced capacity, North American coal producers looked to ramp up production while prices head north.
Meredith Bandy, a coal analyst with BMO Capital Markets, said spot coking coal prices have risen as high as US$350 a tonne in recent days.
That’s compared with a contract price of US$225 per tonne in 2010’s fourth quarter.
BMO has predicted the average contract price in 2011 will be US$270.
But producers in Western Canada might have a hard time matching supply to demand.
“For most Canadian companies to increase their production dramatically enough to really take advantage of it is going to be a challenge,” explained Allen Wright, president and CEO of the Coal Association of Canada.
Wright said increasing production isn’t like “turning on a tap.” He added that it takes time for miners to get equipment and logistics aligned.
And other problems have emerged.
A week ago, miners at Teck Resources’ (TSX:TCK.B) Elkview coal mine initiated strike action after bargaining efforts fell through.
Teck is one of the world’s largest seaborne coking coal exporters, but it recently reduced its production guidance due to avalanche concerns in B.C. and a mechanical failure at Westshore Terminals in Delta.
The mechanical failure was fixed, but then Wyoming producer Arch Coal (NYSE:ACI) signed a five-year shipping agreement with Ridley Terminals near Prince Rupert.
That raised the ire of Western Canada’s coal producers who believe the Crown-owned terminal should put Canadian export needs first.
Meanwhile, a scarcity of supply has also driven mergers and acquisition activity.
Last week, the U.S.’s Alpha Natural Resources Inc. (NYSE:ANR) and Massey Energy Co. (NYSE:MEE) agreed to an $8.5 billion merger.That deal followed a takeover in December that saw Walter Energy (NYSE:WLT) announce plans to buy Vancouver-based Western Coal Corp. (TSX:WTN) for $3.3 billion.
Bandy believes the outlook is good for coal producers who can take advantage of the market.
Said Bandy: “Supply is the driving force now; it’s a seller’s market.”