Coal Markets and Grassy Mountain: “If You Build It, Will They Buy?”
November 13, 2020
Socio-economics. Before the Joint Review Panel began its Grassy Mountain hearing, I speculated that the socio-economic effects of Benga Mining’s proposal to exploit metallurgical coal would be the company’s strongest suit. Given the range of serious environmental questions that will be raised in the hearing, I thought Benga had to make a strong case for the positive socio-economic effects its ambitions would have for the people in the Crowsnest, for Albertans, and for Canadians. But a strong case only can be built on a foundation of favourable markets for coking coal. If Benga builds its Field of Dreams, will the global coking coal market be strong enough to realize the company’s financial promises?
The Promises, the Dreams
When it comes to promises, Benga Mining is making some big ones with respect to what Grassy Mountain will deliver. Big numbers dot its impact assessment application and the evidence of its executives and experts. Perhaps we should expect nothing less from a gigantic project, sprawling over 15 square kilometres, that literally will take the head off of a mountain. Gary Houston, Benga’s Vice-President of External Relations, told the panel that his mine will be “world-class” and “one of the largest single-site sources of steel-making coal” brought to market in recent decades. Ninety-three MILLION metric tonnes – that’s how much coal Benga hopes to mine over 23 years. Benga claims its mine will cost $730 million to build and another $225 million annually to operate. Houston said it will contribute $210 million to the GDP of Alberta and B.C.; he estimates his company will pay $1.7 BILLION in taxes and royalties during the life of the mine; the Municipal Districts of Ranchlands and Crowsnest Pass should receive $1.5 million in property taxes from the mine every year; during two years of construction it anticipates employing an average of 120 people; during operations it anticipates its full-time staff will number 385.
Robin Campbell, the president of the Coal Association of Canada, also tossed out some impressive statistics when he offered the Coal Association’s support for Benga at the hearing. Canada is now the third-largest steelmaking coal-exporting country in the world; potentially Canada could be exporting more than 40 million metric tonnes of coking coal by 2024, more than 50 million tonnes by 2030. Campbell’s Powerpoint presentation underlined that the Grassy decision was crucial to these forecasts. Grassy “will impact future investment for Canadian export coal mining operations.”
The Need to Challenge and Contextualize
Readers should have a shaker of salt handy when they read these claims. During cross-examination no one questioned or contextualized some of Campbell’s key claims. Contextualized? Campbell was correct in using data from the International Energy Agency (IEA) to establish Canada’s coking coal-export ranking. But, he failed to point out that Canada is a very distant third to Australia when it comes to global coking coal exports. In 2018, Australia exported 179 million tonnes of coking coal to Canada’s 29 million tonnes (the U.S. exported 56 million tonnes).
Campbell’s assertion about exporting more than 40 million tonnes by 2024 should have been challenged. The same IEA data that Campbell was happy to cite to establish Canada’s global ranking also forecasts that Canada will come nowhere close to exporting 40 million tonnes by 2024. In fact, that data predicts that Canadian coking coal exports will be slightly lower in 2024, 27 million tonnes, than they were in 2018.
I believe, in other words, that the basis for this Coal Association forecast should be questioned. Why isn’t its view about the markets for Canadian coal similar to the conclusions of a well-established, well-regarded organization such as the International Energy Agency? I’ll offer one possible answer to this question in a moment.
But, before doing so, there’s another aspect of Campbell’s appearance before the Joint Review Panel that deserves your attention. During his cross-examination of Campbell, Drew Yewchuk, a lawyer with the University of Calgary’s Public Interest Law Clinic who is representing Canadian Parks and Wilderness Society, grilled the Coal Association President about the Association’s connections to organizations working on Benga’s behalf. He also grilled Campbell about whether or not the Coal Association had lobbied the provincial government about rescinding the 1976 Coal Policy. Here is that second exchange in full as transcribed by the hearing’s court reporter:
Q (Yewchuk): Who did the Alberta Government consult with prior to rescinding the 1976 coal policy?
A (Campbell): You’d have to talk to them.
Q: Could you name anyone who was consulted about the rescission of the 1976 coal policy?
A: Again, I wasn’t involved in those conversations. You’d have to talk to the government.
Q: Are you a registered lobbyist?
Q: Did you file a lobbyist registration?
Q: Do you know if it says anything about consulting with the government about the 1976 coal policy?
A: Couldn’t tell you.
Q: Okay. Could you undertake to check if it does?
A: But to make your – to help you, I mean, I didn’t lobby the government to rescind the – the 1976 coal policy.
Q: You did not – did you lobby them anything in relation to the 1976 coal policy?
Campbell’s recollection differs from the information contained in the lobbyist registration renewal record that he filed on the Alberta Lobbyist Registry on August 18,2020 (To read that record for yourself you will need to search the Registry. Clink on the “Search” link on the “Search Alberta Lobbyist Registry” page. Then, on the next page, type in “Coal Association of Canada” in the box below the phrase “Search Registry.” You then should be taken to a page where you can review the Association’s most recent renewal.). That renewal states in part the following with respect to the Association’s lobbying activities in the previous six months:
“Program or Policy: Alberta Coal Policy
CAC met with Minister of Energy via teleconference on April 30th to discuss economic opportunities of the coal industry in Alberta, including the 1976 coal policy and existing land-use planning, continued work with the Alberta Energy Regulator through the CAC/AER working group and need for coal mining expertise, federal coal mining effluent regulations as well as any opportunities for fiscal relief in response to business impacts of COVD-19 (sic) (my emphasis)”
This teleconference referred to above took place on the eve of the government’s May 15th announcement that the 1976 coal policy would be repealed. With respect to lobbying activities for the rest of 2020, the Association stated in part that it would discuss the implications of rescinding the 1976 Coal Policy with the provincial government as required. Robin Campbell certified that to the best of his knowledge the information described in the Association’s lobbyist registration was true.
The Price Foundation of Benga’s Dream
Once the mine is built, Benga’s ability to keep its promises about jobs, taxes, and royalties hinge fundamentally on one thing – the price its coking coal fetches in international markets. Throughout the hearing, Benga has insisted on the reasonableness of a long-term benchmark price of $140 USD/tonne for premium quality coking coal. This is the general quality of coal Benga promises that Grassy Mountain will deliver. Benga’s benchmark price has not changed since Wood Mackenzie, a leading international consulting firm, first provided it to Benga in 2016. Our Coalition asked Benga to update this estimate before the hearing began; Benga responded by confirming this benchmark with Wood Mackenzie. At the hearing, Benga refused to disclose what discount from a premium coking coal benchmark price should be applied to Grassy Mountain coal. A discount would arise from transportation costs and also if Grassy Mountain coal quality proves to be lower than the benchmark coal. Benga also would not provide its estimate of the break-even price for Grassy Mountain coal (Gary Houston, Benga’s VP of External Relations, however, did tell the Panel it would be a “fair assumption” to believe that Grassy Mountain’s break-even price would be less than $100 USD/tonne).
It’s important to appreciate that, if coking coal sells for $140 in 2040 near the end of the Grassy Mountain mine’s life, it isn’t realizing the benchmark price quoted in Benga’s application. This is because the benchmark price is represented in “real,” inflation adjusted, 2019 dollars. This means, as Hearing Commissioner Dean O’Gorman drew out of Benga’s Houston, if inflation averages two percent over the life of the mine, the benchmark price in 2046 would be roughly $220 in current dollars.
Subsequent cross-examination of Benga as well as the direct evidence offered by those who oppose this project question Benga’s confidence that this price assumption is realistic. For example, the COVID-19 pandemic, which began after the last Wood Mackenzie estimate submitted by Benga, is taking some of the air out of future benchmark price and production assumptions. On November 6th, the TEX Energy Report reported that the premium hard coking coal contract price for July to September 2020, was $110.17 USD/tonne, down $25.60 from the April to June period. The World Steel Association forecasts a recovery in finished steel production in 2021 – but only to a level that is 49.1 million tonnes less than in 2019. Gavin Fitch, when cross-examining Benga, referred to the IEA’s World Energy Outlook 2020 Report. There, the IEA claims that COVID-19 has produced a structural, longer term, fall in global coal demand. While this fall is most pronounced in the thermal coal demand to generate electricity, the report states that coal’s “use in industry is tempered by lower economic activity.” At the hearing, Benga’s Houston insisted, absolutely incorrectly in my view, that the IEA does not consider coking coal used to make steel to be coal used in industry. His conclusion, never questioned during the hearing, flies in the face of the substance of the IEA’s annual publication Coal Information.
The short to medium term impact of COVID-19 on steel production highlights that, if there is one constant in metallurgical coal markets, it’s uncertainty about just what future conditions and coking coal demand will be. I’ve studied the oil and gas industry for many years now and appreciate just how quickly and surprisingly commodity markets can change. Few, if any, petroleum analysts at the turn of the century predicted that North Dakota crude oil production would skyrocket from 90,000 barrels per day in 2000 to 1,421,572 barrels per day in 2019. No one saw this boom that fracking created. Similarly, who was talking seriously about peak oil demand until very recently?
Uncertainty: Steel Making Technologies
The point is that Benga has bet the farm, so to speak, on the accuracy of its $140 USD benchmark price. A number of presentations questioned whether the “future strong growth of steel-making coal demand” seen by Houston and Benga will materialize. Gail Des Moulins foreshadowed this critique of Benga’s dreams on the third day of the hearing. Mrs. Des Moulins, who lives with her husband Alistair in Coleman, described herself as “just a private citizen putting in my 2 cents worth.” Mrs. Des Moulins devoted part of her two cents to asking the Panel to realize that an increasing amount of incremental steel production in China, the world’s largest steel producer, is coming from electric arc furnaces (EAFs). These furnaces melt down scrap steel and, according to the World Steel Association, use roughly 80% less coal to produce steel than the blast furnace method. The World Steel Association reports that, both in absolute and percentage terms, Chinese EAF steel production roughly doubled in only two years, from 2016 to 2018.
This reality clashes with a claim Benga’s Houston made when answering questions from O’Gorman. Houston said that “in established economies like the North American economy, we’re seeing more and more steel come from electric arc furnaces.” In fact, as World Steel Association data describe and is illustrated in Table 1, U.S. production from electric arc furnaces in 2018 is only 23% higher than it was in 2000. China’s EAF production is 434% higher in 2018 than in 2000; India’s 2018 EAF production was 521% higher than in 2000. Much more of the increase in EAF production has come from China and India than from the U.S. This reality is a cautionary note that should be attached to Benga’s assertion on the first day of the hearing: “The future strong growth of steel-making coal demand is expected to be led by India and China.”
|Table 1: Electric Arc Furnace Crude Steel Production, thousand tonnes, 2000/2018|
|Source: World Steel Association|
The EAF is a steel-making technology that emits fewer greenhouse gas emissions than blast furnaces. Increasing its share of global steel production might help to reduce steel production’s contribution to global emissions. The Financial Times reports that the steel sector, the largest single industrial source of climate pollution, is responsible for seven to nine percent of direct fossil fuel emissions into the atmosphere. Electric arc furnaces aren’t a silver bullet in the climate change fight but they could become even more important in the steel industry if the world becomes more serious about addressing climate change in the next decade and beyond.
Uncertainty: Coal Quality
Cornelis Kolijn, retained by CPAWS as an expert witness, was a coal technical marketing manager for Teck Coal Ltd.’s Elk Valley operations for nearly 17 years. Kolijn gave evidence to the Panel with respect to coal quality. Is the quality of Grassy Mountain coal high enough to be confident Benga will receive the premium coking coal benchmark price of $140 before a transportation discount? For governments and taxpayers, Benga’s coal must fetch $140 per tonne from buyers in order to deliver the company’s promised $1.7 billion in taxes and royalties.
If that benchmark price isn’t realized and instead, Benga receives an average of $100 USD/tonne, the company estimates it will deliver $437 million to Alberta and Canada over the mine’s 23-year operating life…an average of just $19 million a year. While Coal Association president Campbell suggested that taxes and royalties “may vary with commodity price” Benga’s own analyses leave no doubt that taxes and royalties generated by a Grassy Mountain mine “will vary with commodity price.” (my emphases)
Kolijn’s evidence was that only 16% of the Grassy Mountain coal deposit is high quality hard coking coal. He felt that, for a time early in the mine’s life, Grassy Mountain could produce a product that would sit just below the premium coking coal threshold. But, he felt it was much more likely for the mine to produce a second tier, hard coking coal. Such a coal, in his view, only would receive about 82% of the benchmark price for premium coking coal. Coal from Teck’s Elk Valley operations is higher quality coal than Grassy Mountain’s – something that Mike Youl, Benga’s expert on this subject, admitted when he said Teck’s “premium coals are probably a little bit better than Grassy Mountain.”
Throughout the hearing Benga has used corporate confidentiality as a shield to prevent disclosing vital information about coal quality, markets, and contract negotiations. Martin Ignasiak, Benga’s counsel, wouldn’t tip Benga’s hand on any of these subjects when he cross-examined Kolijn. Ignasiak didn’t offer evidence to refute directly Kolijn’s analysis and conclusions. Instead, Ignasiak tried to get Kolijn, based on his career at Teck, to agree that Benga likely had a lot more information about coal quality than it was prepared to disclose publicly. The unstated assumption in Ignasiak’s questioning was that this confidential information must prove that Grassy Mountain’s coal quality was in the same league as premium coking coals. I’m quite confident Ignasiak didn’t pursue this line of questioning to leave the impression with the Panel that Benga was hiding damaging information. It would be good to know if I’m right.
Further to this, Benga cannot tell the Joint Review Panel that it has a single signed contract for Grassy Mountain coal at $140 USD/tonne, or for that matter, at any price. All Benga has offered in the hearing are statements like the company “remains in discussion with a number of potential customers in North Asia and South America” or “Benga remains confident that the project and its product will be well-received into the market.” These statements do nothing to reduce the uncertainty swirling around whether this project is viable in a rapidly evolving global coking coal market. They do nothing to realize its promise to deliver $1.7 billion to taxpayers.
Uncertainty: Seldom Considered in Benga’s Impact Assessment
The importance of recognizing and dealing well with uncertainty in impact assessment analyses animates Dr. Chris Joseph’s critique of Benga’s economic impact assessment. Presenting on behalf of the Livingstone Landowners Group, Joseph noted that “Benga did very little exploring of uncertainty in this economic impact assessment, which gives a false illusion of certainty in many of Benga’s predicted effects.” Benga insists that its pricing assumptions from four years ago are/remain valid today.
Joseph’s evidence supports the conclusion that news and analyses threatening to the foundations of Benga’s analysis and development plans are simply ignored. They shouldn’t be considered in the world Benga wants the Joint Review Panel to render a recommendation in.
Joseph referred to the IEA’s just-released World Energy Outlook 2020 in his evidence. Table 2 presents the Outlooks forecasts for coking coal production under two scenarios, stated policies and sustainable development. In the stated policies scenario, coking coal production falls by 24.8% between 2019 and 2040. The 2019 edition of the Outlook predicted coking coal production would fall, but not by this much. It predicted 2040 production to be 17.3% lower than 2018 production. If the world embraces the sustainable development scenario, coking coal production collapses by 2040. This scenario imagines coking coal production to be 53.2% lower in 2040 than it was in 2019.
|Table 2: International Energy Agency Coking Coal Production Forecasts (million tonnes), 2019-2040|
|Stated Policies Scenario||936||811||764||704|
|Sustainable Dev. Scenario||936||746||622||438|
|Source: International Energy Agency, World Energy Outlook 2020|
Over the next decade, the IEA projects that the global coal trade in coking and thermal coal will decline by about 15% in its stated policies scenario. Its comments about India should give the Panel cause to consider whether Benga’s comments about the future health of the Indian export market are realistic. The IEA writes: “Imports to India barely return to pre-Covid levels over the coming decade as most of the projected growth in coal demand is met by a rise in domestic production.” In the sustainable development scenario, the coal trade shrinks much more dramatically and all exporters “are heavily affected.” If there’s a sliver of hope for coking coal exporters it’s that the decline will be less in Asian markets for their product. In this second scenario, coking coal exports in the next decade to India and some Asian developing countries “slightly increase.” But, even this small ray of hope doesn’t change the fact that this analysis is diametrically opposed to Benga’s assertion that we are on the cusp of an era of strong growth, led by India and China. And, the Coal Association’s speculation that Canada could be producing more than 50 million tonnes of coking coal in 2030 seems to have been conjured on a different planet than the one the IEA knows.
Can Benga build its Field of Dreams on Grassy Mountain and deliver its financial promises to taxpayers? Only if its assumptions about future markets are accurate. There are good grounds for questioning Benga’s very confident view of how the future of coking coal markets will unfold.
– Ian Urquhart, Conservation Director