(Bloomberg) — In the last year, mining companies eliminated about 15 million tons of production capacity for the coal used to make steel, while outlining plans to double those cuts in the near future. It won’t be near enough.
That’s the determination of Chief Executive Officer Don Lindsay at Teck Resources Ltd., the world’s second-biggest exporter of metallurgical coal. For supply to match flagging demand, the industry must cut a total of as much as 45 million tons, he says, raising the ante as prices sit at a six-year low.
While U.S. and Australian miners are now losing money on as much as 50 million tons of annual capacity, they’re dragging their feet on reductions at high-cost mines. The result: a “miserable” market for at least six months, and perhaps as long as a year, according to Lindsay.
“There’s a lot of production that’s underwater, but it takes a long time for them actually to shut,” Lindsay said in an interview. “They always last longer than you think.”
There are two main types of coal. Lower-quality coal is burned to generate electricity, and coal with fewer impurities is used to make steel. Metallurgical coal makes up about 15 percent of production, and sells for about twice the price of thermal coal.
Prices for steelmaking coal surged in 2010 and 2011 and producers raced to increase output to catch up with China’s voracious demand. Mining companies splurged on acquisitions and revved up spending on existing coal assets.
‘Demand Growth’
“Unfortunately for the miners, the flood of new seaborne coal supply in response to high prices was more than adequate to meet demand growth,” Jefferies LLC analysts including Christopher LaFemina said in a research note March 10. “The coal mining industry clearly overestimated Chinese demand growth,” where about half of the world’s steel is made.
U.S. coal producers have already borne the brunt of cutbacks. They are the “most vulnerable,” according to a report Thursday from Moody’s Investors Service, which lowered its outlook for the North American coal industry to negative from stable.
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