Is Port’s expansion of coal infrastructure a high-risk gamble?

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Investors are being warned off a similar project in Oregon because the transportation costs are high relative to competitors. The Morrow Pacific project contemplates a similar scenario of rail to port to barge to port to cargo ship. Handling the coal at two terminals, the cost of barging and the high capital costs of two terminals plus barges would result in a cost disadvantage of $5 to $11 per tonne when compared with competitors.

This would likely result in the terminal’s use only in the event of exceptionally high overseas demand. These complicated transportation requirements are similar to those of the Fraser Surrey Docks proposal and it seems likely that the FSD terminal would be a marginal competitor in any scenario other than a very high global coal demand.

Cheaper shipping capacity under Port jurisdiction is underused

Port Metro Vancouver already has substantial unused shipping capacity. Westshore Terminals shipped 27.3 million tonnes of coal in 2011 and has capacity to ship 33 million tonnes per year. Neptune Bulk Terminals has estimated shipments of 8 million tonnes per year and approved capacity for 18.5 million tonnes of coal per year. That’s a total extra capacity of 16.2 million tonnes (more than four times the amount of the FSD proposal) in terminals that don’t require handling the coal twice or barging it downriver.

Metallurgical coal outlook could leave even more capacity

The Neptune Terminal in North Vancouver primarily ships metallurgical coal (used to manufacture steel) from northwest Alberta and southeast BC. Westshore Terminals also ships predominately Canadian metallurgical coal, although its shipments of U.S. thermal coal are on the rise.

According to the International Energy Agency, B.C. metallurgical coal is at the most expensive end of global suppliers, at around $100/tonne due to inland shipping distances. If the price of metallurgical coal drops, the demand for B.C.’s coal shrinks dramatically. There are two big threats on the horizon according to the IEA. First, China has plans to obtain its own metallurgical coal from more local sources. Second, the best-quality thermal coal is much cheaper than BC metallurgical coal and can replace much of it in steel smelters. The IEA says the combination could rapidly slash demand for B.C. coal by 40% by 2017. That would leave even more unused coal capacity in Vancouver ports.

The global outlook for coal futures is high risk

According to Eric de Place at the Sightline Institute, the market outlook for the Powder River Basin coal is highly uncertain. If coal futures remain at their current levels, it’s likely that all U.S. coal companies lose interest in exports, even from Westshore. Additional capacity would make no sense economically.

A number of recent news reports suggest the coal industry is ignoring fundamental risks in its expansion strategy. A note from Citigroup attacks “one of the most unassailable assumptions in global energy,” that China’s coal consumption will continue on its current growth trajectory. It suggests as a more likely scenario that China will move away from manufacturing, settle for more modest growth and push aggressively toward non-coal resources. If so, its coal trajectory will flatten out before 2020, 15 years earlier than conventional models.

The New York Times calls China’s changing trajectory “a reshaping of global coal markets.” Coal exports are expected to decline by about 5 percent from last year and many experts think the decline will quicken next year. China has modernized its mines, improved efficiency of its coal generated electricity plants and redoubled efforts toward non-coal electricity sources. International coal companies are scaling back across the world.

One coal company couldn’t find financing to buy out a partner in a U.S. mine. Low coal prices and poor earnings caused Teck Resources to scrap plans to reopen one of its mines. According to a Goldman Sachs report, this is “a watershed year for global coal markets. The window for thermal coal investment is closing.”

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