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Paskov mine secure until end of 2017 under a deal between mine operator OKD and the government

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The future of the Paskov mine should have been assured until the end of 2017 under a deal between mine operator OKD and the government. But prices for coking coal, the main product the mine sells to local steelmakers, have collapsed so far and fast that am escape clause from the deal has been triggered that makes closure this year now look a near certainty. Around 98 percent of Paskov’s coal production this year is earmarked for the coking coal market. This is what the Czech minister Mládek had to say last week:

“First of all there are two things. It is necessary to say that there is no future for Paskov mine. This is roughly 1700 employees and it will be closed probably before the end of this year. The future of the whole of OKD is not quite clear and what we would like to see is some kind of soft landing – the gradual closing of the mines. It is necessary to say that the region must prepare itself for living after coal which will probably happen at the latest 2020-2022.”

The OKD mines produce dark or hard coal which is destined either for power plants in the immediate region, producing heat and power, or for turning into the coking used in nearby steelworks, such as the Arcelor Mittal facility in Ostrava, US Steel plant is Kosice, Slovakia, or as far away as the Voestalpine plant in Austria.

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As well as the evolution of coal and coking coal prices going forward, there is also a question about the future ownership of OKD itself as the consequences of past restructuring deals to recapitalize the mining company might start taking effect and fresh cash might be sought again. Minister Mládek again:

“The situation is quite complex because there is a clear structure of the current owners but the problem is that they apparently pledged their share to the bond holders. The bond holders can be changed into shareholders in the future but we are not sure when this will happen and so we will discuss with them about their plans and about whether they are committed to switch into shareholders.”

New World Resources, the current owner of the OKD mines, sees a future for at least three Czech mines, ČSA, Darkov, and ČSM South, until the end of 2020 at least. But how long these mines can function depends a great deal on whether China will revive as a major customer for the world’s coking coal or if its current economic downturn means depressed demand for coking coal and low cost Chinese steel swamping most of the global market and depressing production elsewhere.

The problem with these deep coal mines is that production is not that flexible. Many are subject to high levels of pumping water and expensive maintenance is a must whether they are producing coal or not. In other words, the coal mines cannot really be closed down or mothballed waiting for better times to come.

An examination of the future price trends for coking coal is therefore the best signal whether hard coal in the Czech Republic might get the soft landing that the government is looking for and the Moravia-Silesia region given more time to plan a coal-free future. But price is not the only issue, the Czech mining company complains that it is already at a disadvantage on the market due to a mix of direct and indirect state aid given to rival companies in Poland.

Hector Forster is senior analyst for steel raw material for Platts, the international commodities and energy agency. I asked him first of all where are coking coal prices right now.

“Coking coal prices are at their lowest level since before the financial crisis of 2008-2009. They have fallen by over three-quarters from their peak in 2011. Platts currently assesses premium low-volume hard coking coal, which is a benchmark in Australia, and is also used for European pricing as well to some degree, at a level of 75 dollars 65 cents, metric tonnes fob [free on board] on Wednesday [January 6 ].”

And is there any sort of prospect that those sort of prices might be going upward any time soon or are the basic fundamentals still set for that price to stay the same or even go lower?

“The outlook for coking coal prices based on expectations of market sources that talk to Platts as well as officially reported by miners, including I think NWR, are that the weak price environment may persist for some time due to very low global steel demand growth as well as China’s slowdown and the nation’s overcapacity in steel and coke being exported around the world including into Europe. If you also look at the forward curve for coking coal prices, these are prices today to hedge in the future, the prices are still somewhere in the low 70s mark up until the end of the year. So the outlook on that basis is still pretty poor.”

Looking more maybe specifically at Central Europe, do you think there is any future for mining coal that could be used for coking coal in the future and more specifically for the Czech Republic?

“Well the NWR group’s OKD mines as well as the Polish operations are long-term suppliers of quality coking coal to mills in the region as well as coke plants and industrial plants. Therefore we would expect the demand for that coal to be relatively good because of the problems in terms of importing that coal into ports in Northern Europe and actually rail that into places such as the Czech Republic, Slovakia, Austria, and parts of Poland.

“However, the world price of coking coal would dictate that these mines have to follow the seaborne price environment and at these prices it is very difficult for underground mines especially to maintain their production and costs to a reasonable level and generate cash to maintain these operations and expand them.”

Are there any signs at the moment of any significant shipments of coking coal into Central Europe from further abroad?

“Well certainly the main steel groups have used a blend, a mixture of coking coal from Poland and the Czech Republic with material from Australia, from the US and Canada, as well. This is not particularly unusual but the fact is that the proportion of coking coal and coke produced in Central Europe may come down especially because of the risk of the high cost of production as well as, perhaps, geological issues that have been indicated and that have made the quality and usage of some coals restricted because of the quality of the coal.”

And within the Central European region, I don’t know whether you can say whether some of the Polish producers of coking coal have an advantage over the Czech ones?

“Well, I think that the JSW operation is one that produces typically a lot of coke and that sells on a contract basis and in terms of a relative price advantage, it is difficult to say because they are privately negotiated contracts both for coking coal and coke. But there is certainly a large industry in Poland as well and we would expect that continue, albeit in a high cost and low margin environment for some time to come.”

And finally, on the prices you mentioned the prospects for a year ahead. But further ahead is it possible to say whether prices will stay pretty weak, perhaps for the next years or so?

“Certainly looking at the analysts from investment banks and from industry, we can see that the low price environment can be expected to continue at least for the short term. In the medium term, I think that some of the supply and demand fundamentals might point to a recovery in prices perhaps at a quicker and at a faster and greater rate than the iron ore market which looks like it might be oversupplied for a longer time. There could be something brighter on the horizon for coking coal relative to iron ore. I think the demand for coking coal is going to be dictated by what happens with steel prices and margins as well. And it depends on the level of exports from China and other emerging economies.”


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