A major driver of Colombia’s strong growth over the last ten years has been the growing production and export of coal made possible through continuing foreign direct investment into the commodity sector. With production of 88.6 million t during 2014, Colombia became the world’s 11th largest producer of coal and, over 2013, was estimated to be the 4th largest exporter. Production in 2015 is expected to be between 87 and 97 million t with recent estimates in favour of the lower figures, largely due to increasing market uncertainties. In the longer term, both production and exports are slowing, while there are also fears that the investment climate faces downside risks.
Over the five-year period 2005 – 2009, production grew 23%, but over the following five-year period (2010 to 2014), growth was four points down at 19%.
According to the first official 2015 production forecast, growth over the five years since 2011 will drop only marginally by <1 – 1% against the previous five years. However, it is more likely that production over 2015 will be closer to 87 million t, bringing the five years growth to just 1.4%, a drop of 12 points on the previous five years.
The country had a proven reserve of 6476 million t as at the end of 2014, the world’s 12th largest and the largest in Latin America. At the current rate of production, there is enough coal to sustain 76 yr of mining.
Over 2012, Colombia exported 83.7 million t. Ranking 5th in the world, it joined Indonesia, Australia, Russia and the US in the group of countries that export 80% of the world’s total. Over 2013, with exports at 74.6 million t, it most likely took the place of the US in the top four.
Over the five years 2004 – 2008, exports grew 26%, while over 2009 – 2013 they dropped four points to 22%. Growth over the five years from 2011 to 2015 is expected to be marginally negative: <0.1%, dropping 13 points against 2006 – 2010. However, if production does not slide to 87 million t over 2015, exports may not be hit so hard with five year growth dropping no more than two points. There would be more coal, but would there be demand for it?
The Organisation for Economic Cooperation and Development (OECD) recently reported that in 2013 coal and solid fuels manufactured from coal totalled 11% of the country’s total exports – well behind the export of petroleum and crude oil at 54%. But to better establish the true value of both coal exports and production to the Colombian economy, this must be read against the current primary energy mix – and what is happening to it as the major contributor, oil, runs out.
Adding it all up
Colombia’s primary energy mix in 2014 was 11% coal, 37% oil, 25% natural gas, 26% hydro and <1% renewables. Coal represented 4.2 million t of oil equivalent (toe) or 6.5 million t of coal. Oil represented 14.5 million toe, meaning 22.3 million t of coal – or 25% of total coal production – would be needed to replace it. Hydro represented 10.1 million toe, requiring 15.6 million t (17.5% of production) of coal to replace it; natural gas accounted for 9.8 million toe, requiring 15 million t of coal to replace it, 17% of production.
The replacement coal could only come from reducing exports, which means that Colombia will need to use a significant amount of its then current export coal to replace oil in the energy mix when it runs out in about seven years (at the current rate of consumption) and then to replace natural gas in another seven years when that reserve is also exhausted.
These projections are not just threats, they are what will happen unless Colombia can find more natural gas, oil, other energy sources, or more coal export destinations – and that in the face of falling export demand from Europe and the US.
That said, not all replacement energy need come from coal as Colombia’s potential for more hydropower is second only to that of Brazil, where 75% of all primary energy comes from hydro.
Colombia, the US and Asia
Greater domestic demand for Colombia’s coal is only one side of the coin when it comes to its export potential. On the other side is a slowdown in coal demand from the traditional markets: Europe, which takes 67% of Colombia's coal exports, and the US, which takes about 4%.
Another question has to be: could Asia figure more prominently in the calculations? The answer to this is a definite ‘very likely’.
It is clear that any potential for an increase in Colombian exports to the US is of only slight significance; the current figure of 7.5 million t already covers 73% of total US coal imports.
President Obama’s ‘war on coal’ in the US may be hitting the coal industry in that country hard, but it is having a positive impact on the industry in Colombia.
A deal completed in June 2011 by US-based coal miner Drummond, spurred by the growing adverse attitude towards the coal industry in the US, gave Japan’s Itochu Corp. a stake in Drummond International, which now owns and operates the US company’s Colombian interests. The partnership aims to increase coal exports to Japan and other Asian countries. The deal was spurred by stricter US government regulations that were causing coal-fired power plants to close and no new ones to be built.
Four years later in August 2015, US producer Murray Energy Corp., for the same reasons, acquired Colombia Natural Resources, which includes two developed opencast coal mines (La Francia and El Hatillo), three undeveloped mines, more than 184 million t of reserves and a stake in a railroad to a coal terminal.
“As the US coal industry continues to be under attack for elimination by the Obama Administration, we must look to international markets to ensure our survival,” Robert E Murray, Chairman, President and CEO of Murray Energy, said. His Executive Vice President, Chief Operating Officer and Chief Financial Officer, Robert D More, added: “acquiring assets in Colombia will broaden our international presence in an attractive market and position ourselves to better serve our customers around the world.”
Colombia Natural Resources was previously owned by the Goldman Sachs and the sale was in line with the bank’s ‘war on coal’-inspired exit from the coal business.
Is the export slowdown only in response to the growth in renewable energy in the export-destinations for most of Colombia’s coal?
The OECD has criticised export infrastructure, but not specifically that relative to coal. The industry has been quiet on the subject. In September, the government okayed the final clause in the peace deal with the Revolutionary Armed Forces of Colombia (FARC), the former guerrilla movement that had been disrupting railway operations.
In September, a Special Jurisdiction for Peace was announced and it was decided that a final agreement should be signed by 23 March 2016. After signing, a maximum of 60 days would be allowed in which FARC must completely disarm. Analysts comment that similar statements have been made and deadlines set before. The industry-relevant ongoing issues seem to centre around FARC’s dissatisfaction with the share of government revenues from coal that are diverted to the regions it claims to represent, regions that host considerable coal resources.
There is an ongoing logistics threat in that the Constitutional Court has ruled to halt night traffic along a 226 km line, which moves more than half of the country’s coal exports – but this is being appealed. Residents of a town halfway along the line complained of noise at night and dust 24 hr a day. In 2013, the trains were banned by environmental authorities but the ban was overturned within weeks.
Are there production problems? Seemingly no. Output was hit by strikes during 2013 and early 2014, but there have been no labour problems since. The Colombian coal mines are: Cerrejon, a joint venture between BHP Billiton, Anglo American and Glencore, which produces approximately 40% of the country’s coal. Mina Pribbenow and El Descanco, owned by US company Drummond Mining, produce 29%. Calenturitas and La Jagua, owned by Canadian company Prodeco, produce 26%. US company Murray Energy mines’ La Francia and El Hatillo produce 4%. Canadian owned Pacific Coal Resources’ mines La Caypa and Cerro Largo, and produces <1%. (In some cases, Colombian subsidiary companies have been established to satisfy government legislation over ownership and the operation of the mines).
As of 11 October, there were ambitious plans to develop further mines and boost the Colombian industry, but they were recently forced into limbo.
In February 2014, it was announced that CCX Carvao da Colombia SA, the coal unit of Brazilian entrepreneur Eike Batista’s empire, which is now facing bankruptcy, had agreed to sell its Colombian coal mining assets to Turkey’s Yildirim Holding A.S. for US$125 million. Yildirim is one of the leading globally diversified industrial groups, with considerable investment in energy projects.
The assets are three projects: two opencast mines (Cañaverales and Papayal), the San Juan underground mine and a railroad and port. Future plans for all of these projects are uncertain.
Canaverales has 27.3 million t of reserves, Papayal has 15.6 million t and the flagship San Juan has 671.8 million t and is said to be one of the world’s five largest coal deposits. In its reports, CCX did not make clear whether these figures were proven reserves, measured or indicated, or resources. The port known so far only as ‘Puerto’ is a proposed coal export terminal.
On 12 October, Yildrim pulled out of the deal, claiming conditions precedent had not been met. While the issues are being decided by international arbitration, Batista may not talk with other potential buyers. There was one around in April – a group of sovereign investment funds and other large investors represented by Blackstone, the world’s largest private-equity investment company.
Fears for the investment climate
In its 2015 report, the OECD said Colombia’s economy had done remarkably well over the last ten years. Strong growth had been driven by a mining boom and foreign direct investment into the commodity sector, as well as broader-based investment.
Inflation had been contained to within a 2 – 4% target range since mid-2009. However, lower coal prices had contributed significantly to a widening of the current account deficit. Current external debt was 24% of GDP, largely financed by foreign direct investment. The increase in the deficit could make Colombia more vulnerable to fluctuations in the global risk appetite for investors. The balance of risk was tilted to the downside: geopolitical risks could affect Colombia’s coal exports and the current income tax regime continued to impact on investment decisions.
Transport infrastructure remained a constraint on growth, since almost half of Colombia’s exports were logistics intensive. Enhancing access to international markets was needed to take advantage of recently signed free trade agreements with the EU and the US. A new oil and mining revenue sharing system had decentralised planning and improved the framework for infrastructure investment. But more building capacity was required to strengthen planning and execution.
Significantly, the income per capita in Colombia was the seventh highest of 36 OECD countries. It was double that of the US, and more than double that of the UK. This suggests that Colombia will need to raise considerably more tax revenues in the near future to finance social expenditures. The OECD concluded that Colombia should shift some of a growing tax burden from the corporate to the personal.
The World Bank recently reported that economic growth in Colombia was 4.6% over 2014, well above the regional average of 1.5%. However, further decreases in oil prices had been impacting the Colombian economy during 2015 and, in this adverse environment, growth was expected to slow to 2.9% over the year and 3.2% over 2016, but still remain the highest of that in the Latin American countries.
Fiscal management continued to be among the strongest in the region. In 2014, the structural fiscal deficit was 2.3% of GDP and expected to be in the order of 2.2% for 2015
Edited by Jonathan Rowland. This article first appeared in the December 2015 issue of World Coal.
About the author: Bary Baxter is a World Coal correspondent covering southern Africa and Colombia.
Read the article online at: https://www.worldcoal.com/special-reports/07122015/feeling-the-pinch-colombia-regional-report-3210/