Recent History – 2000
From Canadian Press in Peace River Block News, February 14, 2000
Almost two decades after it opened, British Columbia’s northeast coal project faces another year of lower export volumes at shrinking prices. An old-fashioned megaproject in trouble almost from the beginning, the project cost its original investors and taxpayers hundreds of millions of dollars.
But its supporters – and even some early naysayers – insist the mining development was worthwhile economically. Besides the $8 billi9on in revenues from sales to Japan’s steel industry, the project pumped billions in cash through the northern B.C. economy, says Gary Livingstone, president of the Mining Association of British Columbia.
“If you’re doing your economic evaluation, it seems to me you’ve got to take in all of those things that came into the province because of that,” says Livingstone, who once worked in the rival southeast B.C. coal sector.
But with the mines scheduled to shut down in March 2003, the struggle to eke out profits is getting harder. Teck Corp., operator of the Quintette and Bullmoose mines, is negotiating lower transport and loading fees with the railways and federally owned Ridley Terminal in the north-coast port of Prince Rupert. The Vancouver-based mining conglomerate expects the price for its metallurgical coal to drop to about $39.75 US a tonne from the current benchmark of $41 US.
Demand remains soft because Japanese steelmakers, the customers of northeast coal, have not recovered from a competitive slide that began in the 1980’s and was exacerbated by Japan’s continuing recession. Teck is the majority owner of Bullmoose, holds a 45 per cent stake in the larger Quintette Mine and manages both. The two mines operate at roughly half their combined capacity of seven million tonnes a year – a figure they’ve never achieved since they opened in late 1983. Teck took a $24 million writedown on Bullmoose in its year-end financial statement earlier this month. Quintette isn’t shown on the balance sheet because Teck is a minority stakeholder.
Northeast coal was one of Canada’s last megaprojects – an economic policy in vogue until the early 1980’s that involved governments partnering with big business to bolster strategically important industries and economically underdeveloped regions.
Worried about energy-price hikes and supply uncertainty in the 1970’s, Japan’s steel industry wanted new, stable sources of metallurgical coal.
Social Credit Premier Bill Bennett saw a chance to open up part of northeastern British Columbia to economic development. The province funded construction of a $400 million, 300 kilometre rail line linking the mines to CN Rail’s main line to Prince Rupert. It also built access roads, hydro connections and services for the all-new town of Tumbler Ridge, about 60 km west of the Alberta border. The federal government helped build the coal terminal at Prince Rupert. The total bill to taxpayers came to about $1.6 billion. Development of the two mines added up to another $1.5 billion in private investment. The overall investment was to be guaranteed by 15-year supply contracts with the mines’ Japanese customers at well above the market price. But before the first Japanese ore freighter even loaded its first shipment at the Ridley Island terminal in January 1984, the steelmakers began demanding cuts in volume and price.
The predicted non-stop rise in oil, gas and coal prices never happened. Japan’s steelmakers faced new competition from mills in places like India and South Korea, which had access to cheaper coal sources.
The Japanese never threatened to walk away from their commitments. But a series of arbitrations began pushing down the price from the original contract price of $98 CDN a tonne, about 40 per cent above prevailing world prices. A deal signed in 1997 extending the long-term contract until March 31, 2003 keyed northeast coal to prices from southeastern B.C. and Australian mines. Contract volumes, too, have ratcheted down.
The reduction forced BC Rail and CN Rail to cut freight rates for the 100-car coal trains and Ridley Island terminal to reduce its handling fees. BC Rail spokesman Alan Dever says the Crown-owned railway has never recovered its investment in the line.
“I think we have serious concerns about the future of that line after 2003,” he says.
Northeast coal also accounts for about 20 per cent of BC Rail’s overall commodity traffic.
Northeast coal drew criticism from the outset as uneconomic. Quintette’s complex geology, the 965-kilometre rail trip to tidewater and the capital costs of new infrastructure combined to undermine the business case for the project. Some argued any new mines should be developed in southeastern BC, close to the CP Rail main line. But that was a non-starter for the Japanese, who insisted on an all-new supply source.
The mines were “unbelievably profitable” at the premium prices northeast coal received in the a980’s, says mining analyst Haytham Hodaly of Salman Partners.
The federal and BC governments justified their infrastructure investments by pointing to other potential coalmines in the area, at Sukunka, Monkman and Pine Valley. But the follow-up projects never happened. Oil companies, which bought into coal in the energy-crisis era, bailed out when prices tanked in the 1980’s.
The population of Tumbler Ridge, the purpose-built town that houses the miners, peaked at near 5,000 in the early 1980’s but now is down to 2,500. The mines’ workforce, which started at 2,000 has shrunk to about 725.
But the project still has defenders. Besides the $8 billion in coal revenues, the megaproject accounts for another $13.6 billion in spin-offs, argues economist Lorne Grasley, the mining associations policy and finance chief.
“They’ve had a rough go cost-wise, because BC is a very high-cost environment in which to produce,” says Grasley. “Having said that, they’ve done a remarkable job of making money at the same time they’ve helped the province recover its infrastructure investment. So it has paid off, I would say so.” But new developments are unlikely until coal prices recover.
“Prices would have to rise at least 20 per cent for them to even consider it,” says Hodaly. “Right now, there’s no point in throwing good money after bad.”
The government is more optimistic. “We’re hoping we’re seeing the bottom of the coal-price trough”, says Karen Koncohrada, director of the minerals, oil and gas branch at the BC Ministry of Employment.