Colombia's coal industry pins hopes of salvation on China
Colombia's coal industry is experiencing one of the worst crises in its recent history. The Covid-19 pandemic has compounded problems including labour strikes, criticism of its environmental and human rights standards, and a decline in sales to its traditional customers, which began at least five years ago.
In the midst of the gradual loss of European markets as they
transition towards clean energy, coal companies have looked to China - the
country's second largest trading partner and a coal importer - as a possible
destination for part of their future production.
However, any hopes China will save the day seems a remote
possibility.
Colombia’s coal crisis
September 2020 began with a strike at El Cerrejón, the
country's largest coal mine, after labour negotiations collapsed between its
operator Carbones del Cerrejón and Sintracarbón, the workers' union. Almost at
the same time, BHP Billiton, one of three companies along with Glencore and
Anglo American that own the mine in equal shares, announced that it would sell
its 33.3% stake.
A few weeks later, David Boyd, the UN’s special rapporteur
on Human Rights, called on Colombia to halt production at the mine until there
were safeguards in place to protect the social and environmental rights of the
surrounding indigenous communities.
"I call on Colombia to implement the guidelines of its
Constitutional Court and to do more to protect the vulnerable Wayúu community
in the Provincial indigenous reserve against contamination from the El Cerrejón
mine and against Covid-19," he said.
These labour and social crises have coincided with a
progressive reduction in international demand for coal and a loss of markets
for Colombia, the world's twelfth largest producer. For years, coal has been
the country's second largest export and an important source of national income.
However, figures for reveal a downward trend. "In terms
of volumes, we think Colombia's coal exports will fall to at least 58 million
tonnes in 2020, compared to 74 million tonnes in 2019. And they could fall
further if there is a long strike at El Cerrejón," said Guillaume Perret,
director of London-based market analysis consultancy Perret Associates.
This fall in exports has been accompanied by a fall in
prices and production. Largely because of the pandemic, the country's
production fell by 7% in the first quarter of 2020 compared to the previous
year and by 48.8% in the second quarter. Likewise, Colombian coal averaged
US$38 per tonne between March and June 2020, and has fallen further to $33 –
the lowest price since 2004, Claudia Bejarano, president of El Cerrejón, told
economic daily La República.
Three large coal companies in the country has felt the
impact: Cerrejón, Drummond and Prodeco. "The mine that Glencore has in
Colombia, through the company Prodeco, which it owns, has not been operating
since March 23 [...]. Prodeco has asked not to produce coal from its mines for
four years, but the Colombian mining authorities have refused to give this
authorisation," Perret said.
Meanwhile, the price of gold has risen by 14% in the second
quarter of 2020. Anticipating a shift in focus towards a more profitable
product, Diego Mesa, minister of mines and energy, said in an interview with
Reuters on October 2, that the future of Colombian mining was in metals:
"The great opportunity for Colombia is in metal minerals because they are
in the greatest demand at this time and in the future."
Mesa’s statement statement sent shokewaves through
Colombia’s coal industry. Silvana Habib, a consultant on mining issues and a
fromer president of the National Mining Agency, said; "when you talk about
Colombia as a mining country, you are talking about a coal-producing country.
"Right now we need all sectors to help improve accounts
and have more resources. In my opinion, there is no other economic activity at
the moment that can replace what coal generates, not only in terms of royalties
and employment, but also in terms of social investment," Habib added.
Coal accounts for 77% of Colombia's mining exports and 18%
of its total exports. This year, its GDP could contract by 7.8%, according to
the International Monetary Fund, and unemployment rose to 16.8% in August
because of the pandemic. The stakes are high.
US and European markets dwindle
Covid-19 represents the latest in a number of challenges for
Colombia’s coal industry, which faces a black future as global demand centres
shift amid countries’ structural energy transformations.
The main market for Colombian coal has traditionally been
Europe, which between 2011 and 2013 accounted for 50% of exports. However, the
market has since collapsed as some of its main clients, such as the Netherlands
and Germany, implemented energy transition policies, switching from thermal
electricity sources to clean technologies. Today the EU buys only 10% of
Colombia's coal exports.
"The two major poles of Colombian coal, which are
Europe and the US, have experienced a very rapid fall in demand for coal in
recent years," says Paola Yanguas, research associate at the Coal Exit
research centre.
"In the EU the main reason for the fall has been
climate policy. In the US, it’s competition from other energy sources, such as
shale gas [obtained by fracking] and renewable energies, mainly solar and wind
power.
This situation highlights Colombia's lack of planning. For
the past five years, the country has had to start looking for new clients. But
rather than targeting specific markets, the policies of the last two
governments have focused on supporting production or infrastructure.
"Government policies are not focused on a particular
market but on improving the sector's competitiveness so that it can access
increasingly distant and competitive markets such as Asia," says Juan
Camilo Nariño, president of the Colombian Mining Association. “We are working
with the Government to promote a policy that will enable it to be increasingly
competitive."
The government of President Ivan Duque, however, has not
outlined a concrete plan of action.
"I don't think the government has sat down and looked
at the details,” says Giovanni Pabón, a researcher into carbon and a former
coordinator of the Environment Ministry's Climate Change Mitigation Group.
"We are going to have a serious problem with financial flows and
employment generation in producing areas in about ten years or so".
Coal companies, meanwhile, seem less inclined to talk
publicly about the future of the business. At Carbones del Cerrejón, the
largest company in the sector, the press office did not respond to our four
interview requests since August, although their official mails returned
automatic responses explaining that they were on strike.
Drummond, the second largest national producer and a private
US company operating two mines in Cesar department, eventually responded,
declining the offer to contribute to this article after a month of
consultations with their parent company. And Prodeco, the third largest coal
company in Colombia, claimed that they could answer our questions, but that
they would refer them to their parent company, Glencore, in Switzerland. As of
the date of publication, they had not responded. Fenalcarbón, the coal
producers' trade association, said it had no spokespersons available.
China, the promised market?
China is seen as a form of commercial promised land, an
evaluation often based on wishful thinking reather than reality. Valora
Analitik, an economist, however, has said that the world's largest coal
consumer could throw a lifeline to Colombian coal.
At the end of the day, it is still a colossal market. China
imported 299.7 million tonnes of coal in 2019. Despite the Covid-19 crisis, its
imports between January and April 2020 increased by 26.9% on the previous year
to reach 126.73 million tonnes, according to statistics from the SteelGuru
Strategic Research Institute.
For a few months in 2020 there was the illusion of a fast
gateway to China. A diplomatic conflict between Australia and China, caused by
Canberra's call for an international enquiry into the Covid-19 pandemic, led to
a temporary halt in Australian coal imports. The opportunity seemed huge –
Australia is the world's fourth largest producer.
The pandemic also led to a fall in sea freight volumes, and
with it a fall in prices, facilitating access to the Asian market. Freight
costs, which are normally between US$20 and $25 per tonne between Puerto
Bolivar in the Colombian Caribbean and south-east China, fell $12.25 in April
and $10.80 in May, according to figures from Perret Associates.
This window of opportunity, however, closed when the cost of
freight rose again. In July it reached $27.25 per tonne. Several experts agree
that the cost of transport means China is an unliekly major market for
Colombian coal. Although it grew in the first half of 2020, China still
accounts for scarcely 1% of Colombia's coal exports.
"When freight prices rise, Colombia is at a
disadvantage because it competes with Australian, Indonesian and Russian
coal," says Guillaume Perret. "Colombian coal is a volatile supplier
to the east. When freight rates are low and demand is strong, it can be
exported, but when costs rise, it is not competitive".
Chinese President Xi Jinping dealt a further blow to
Colombia's coal ambitions when he announced at the UN in September that China
aims to peak its greenhouse gas emissions by 2030 and achieve carbon neutrality
by 2060. Like Europe, China is advancing its own energy transition.
The future of Colombian coal
While Colombia's environmental commitments under the Paris
Agreement are not linked to its coal production, changes in international
demand do depend on the climate objectives of its customers. Greenhouse gas
emissions that cause climate change count only for the country that burns fuels
like coal, but not for those that produces and sell it, like Colombia.
Instead of China, Turkey and other emerging economies could
save Colombian coal, according to observers. The huge increase in Colombian
coal exports to Asia is due to the fact that Turkey is considered part of the continent.
Between 2005 and 2015 sales increased by almost 400%. In 2019, Colombia
exported US$1.1 billion worth of coal, representing 94.7% of its exports to the
country, according to figures from the Ministry of Trade, Industry and Tourism.
There is one problem. When Turkey and other emerging
economies upon which Colombian coal depends, such as Brazil and Panama, get
serious about their energy transitions, this potential lifeline would
disappear.
"It's not so much a question of finding new
markets," says Giovanni Pabón, who stresses that there are structural
problems the national coal industry might not recover from. "It is bad
news at an economic level, but it is good news for our creativity in
transforming coal jobs into renewable energies," he adds.
As it rapidly loses one of its main sources of export
revenues, Colombia may have no choice but to adapt or perish.
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