Coal Being Replaced by Natural Gas to Generate Electricity

Graphic for News Item: Coal Being Replaced by Natural Gas to Generate Electricity

Most CEOs paint a rosy picture when they talk about their companies’ prospects. Not Guillermo Fonseca.

The CEO of Colombian coal giant Cerrejon—jointly owned by BHP Group, Glencore and Anglo American—isn’t sugar-coating anything. The industry, he says, is in terminal decline, and the company is suffering. Prices slumped, a drought hampered operations, and his mine is on the wrong side of the Panama Canal.

“The large impact we foresaw from the market disappearing, we always saw as out there in the future,” Fonseca said during an interview in Bogota. “Well, the future is now.”

While coal demand remains strong in Asia, it’s withering in North America and Europe as power generators turn increasingly to cheaper and cleaner natural gas, wind and solar power. That’s particularly hard for Cerrejon, which sells much of its coal to Europe. Fonseca projects demand from some countries in the Atlantic market may fall another 50% to 60% over the next five to seven years.

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Fonseca’s grim outlook doesn’t bode well for Colombia. Coal is the nation’s biggest export after oil, and Cerrejon operates one of its largest mines, a sprawling and terraced open-pit operation near the Caribbean coast. Fonseca is telling the government, unions and local communities that Colombia has a limited window of opportunity to make the most of its vast coal resources while there are still buyers.

Meanwhile, BHP has hired JPMorgan Chase to find a buyer for its stake in the Cerrejon mine as part of its plans to exit the thermal coal business, according to people familiar with the situation.

Cerrejon will produce about 26 to 27 MM tons of the fuel this year, Fonseca said. That’s below the company’s target of 30 MM tons, he said, and the lowest in more than a decade. Dry weather forced the company to suspend output in some of the pits to avoid breaching air quality regulations.

Fonseca may not have much incentive to project optimism. His company doesn’t have stocks or bonds that trade, and he has union talks coming up later this year.

Price Plunge

Steam coal prices in Rotterdam are down about 33% this year, as mild weather and competition from cheap natural gas have sapped demand. If prices don’t bounce back, Cerrejon may need to shutter some operations and production may fall permanently to about 26 MM tons per year, Fonseca said.

“Fortunately, the company had a good cash reserve. So even though we’re going to be losing an important amount of money in 2019, that’s part of the commodity business. And the shareholders understand that,” he said. “There is no risk of insolvency or anything like that.”

The biggest global bright spot for coal is Asia, where China and India are still building coal-fired plants. But it’s not an easy region for Cerrejon to serve. For one, shipping costs from Colombia make it hard to compete with mines in Australia and Indonesia. Plus, Cerrejon’s mine is near the Caribbean coast. So, ships would need to cut through the Panama Canal or around Cape Horn.

Consequently, Cerrejon plans to focus on the Atlantic for as long as it can. The company calls the strategy “delay going to Asia.”


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