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Beyond Colombia - Part 2

World Coal,

Production gains uneven

In keeping with recent trends, total regional coal production is likely to see nominal growth. Again, Mexico and Brazil will lead the region owing to their developed coal mining sectors and coal reserves. Still, Mexico and Brazil, along with Chile, Argentina and Venezuela, will only account for a minimal share of global production despite being active producers. In 2011, the last year for which full data is available, the five countries combined accounted for just 0.27% of total global production, according to the EIA.

Coal exports and imports (thousand t). Data comprises Argentina, Brazil, Chile, Mexico and Peru.

The best of the rest: Brazil and Mexico

Outside of Colombia, Mexico remains the largest producer of coal within the region. Total coal production amounted to 12.8 million t in 2012, double that of Brazil, which produced 5.8 million t. The top coal-producing regions are the Sabinas and the Fuentes-Rio Escondido basins of north-central Coahuila, which produce 90% of Mexican coal. Top producers include Grupo Acerero del Norte (GAN), Materiales Industrializados (Minsa), Grupo México and Carbonifera San Patricio.

The country’s steel industry is set to expand output over the next several years. Metallurgical coal imports are likely to increase to supplement domestic production and meet demand from Mexican steelmakers. Indeed, Q1 of this year saw US metallurgical imports rise by 72%, according to data from the EIA. While Business Monitor does not expect such heady growth to continue, metallurgical imports will continue to increase.

Brazil possesses the largest coal reserves in the region and is a producer of both the thermal and metallurgical variants. However, the country is a particularly large importer of the latter, given the size of its domestic steel industry and the country’s relatively low-quality deposits, which have high ash and sulfur content. The country’s mining industry has largely focused on iron ore, nickel, gold and other metals at the expense of coal investment. After production declines of 13.7% and 5.1% in 2009 and 2010, respectively, due to a significant contraction in consumption as a result of the financial crisis, Business Monitor does not see significant production gains in the coming years and expects growth to slow below 5%.

Of particular importance is pending mining legislation in both Mexico and Brazil. Royalty rates are expected to increase in both countries, which may discourage domestic production in favour of imports. Should proposed legislation raising royalty rates be approved by both the Mexican and Brazilian congresses, imports from countries including Canada, Colombia and the US are likely to increase.

The minnows: Chile and Peru

Chile and Peru are unlikely to see much production growth in the coming years, as both countries have few active coal mines. Both will continue to rely on a few domestic mines, as well as imports from major coal producers abroad. Chile, in particular, will continue to rely on US imports for both thermal and metallurgical coal. Indeed, Chile was the second-largest importer in Latin America (after Mexico) of US thermal coal in 2012, though it moved to first place in Q1 of this year. Chile was also the second-largest importer (after Brazil) of metallurgical coal from the US in 2012.

Given both Peru’s increasing focus on developing gas supplies for domestic energy consumption and the country’s relatively small domestic steel industry, the country is unlikely to emerge as a large regional coal producer in the coming years.

Americas mining risk/reward ratings (scores out of 100 with 100 representing the best).

Trade dynamics

When excluding Colombia, Latin America will continue to import far more coal than it exports. Indeed, the region ex-Colombia consumes the vast majority of its domestic production. According to data from the EIA, the region exported approximately 83 million t of coal in 2011, of which Colombia’s share accounted for 97% of the total. Venezuela accounted for 2.5% of exports, though its coal exports have been in decline since 2006. A lack of investment in the coal sector, due to the country’s poor business environment and elevated political risk, will lead to further declines.

Imports will remain broadly diversified across the region, though Brazil still dominates, importing 59% of total coal shipped to Central and South America. Brazil alone imports seven times more metallurgical coal from the US than both Mexico and Chile individually. Chile remains the second-largest importer of total coal shipments to Central and South America, at just over 22%, and Argentina the third-largest, at a distant 6%. The majority of countries in the region are hence net importers of coal – both metallurgical and thermal – to meet power generation and steelmaking needs.

The US remains a major exporter, supplying both variants of coal. However, the mix of coal varies by country. In Q1 of this year, the last quarter for which data is available, Brazil imported 2.3 million t of coal from the US, 91% of it metallurgical to feed the country’s steel mills. Chile, which imported 525,000 t over the same period, saw the reverse, with 91% of its imports being thermal, likely due to the country’s own difficulties approving new coal mining projects.

Written by Ben Kutler.

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