Westshore Terminals, the largest Canadian coal export terminal, is facing an uncertain future given the potential loss of several large customers including Teck Resources and Cloud Peak Energy, a Seaport Global report said Monday.
Teck, the world's second-largest metallurgical coal producer and the terminal's largest customer with throughput of 17 million mt in 2018 out of 30.5 million mt in exports, will move much of its volume to Vancouver-based Neptune Terminals once its contract with Westshore, also in Vancouver, ends in the first quarter of 2021.
According to senior analyst Mark Levin and senior associate analyst Nathan Martin, Teck could increase its Neptune exports up to 16 million mt per year, from 7 million mt in 2018, with the producer's expansion plan, which should be completed in 2020.
"Expanding Neptune provides it with the wherewithal to take advantage of demand surges when they exist," the Seaport analysts wrote.
Additionally, the move is likely encouraged by cheaper rates at Neptune, increased negotiating leverage provided by an alternative terminal option and assurance Teck vessels will not have to wait behind other companies' coal vessels, the report said.
"Teck will almost certainly move tons away from [Westshore]; it's just a question of how much," Seaport wrote.
Although, "we think [Westshore] offers certain advantage that Neptune doesn't," they wrote, added: "So, it's certainly possible that it will keep more tons than it might need at the facility."
EXPORTS FROM PRB PRODUCERS
Another potential loss for Westshore depends on the future of Cloud Peak and as the report said, "we think it's reasonable to assume [Westshore's] contract(s) with [Cloud Peak] may not survive a [potential Cloud Peak] bankruptcy."
Cloud Peak exported about 4.6 million mt through the terminal in 2018.
The company missed a loan payment earlier in March and is in talks with creditors about restructuring its balance sheet. But analysts are forecasting an April Cloud Peak request for protection from its creditors.
Based on Seaport estimates, the producer is likely losing money on exports without fixed-price contracts given its costs including a $10/st-$11/st mining cost, a rail rate around $35/st, and a $10/st Westshore port fee, totaling $45/st-$46/st.
In a third quarter of 2018 earnings call, Cloud Peak CEO Colin Marshal said it is "not so good" for the producer when the Kalimantan 5,000 GAR price is $55/mt, and, as of Friday, the price was $55.30/mt. According to Seaport, the Kalimantan price is expected to remain below $60/mt given accelerating Indonesian production and uncertainty around Chinese import policies and its overall economy.
Other Powder River Basin producers, such as Lighthouse Resources and Signal Peak Energy, may pull back their export volumes, as well. Referencing a Doyle Trading Co. report published March 21, the Seaport analysts noted Lighthouse's Decker mine has already stopped exporting through Westshore.
Westshore's "best chances" to backfill any potential tonnage would be Riversdale Resources' Grassy Mountain coking coal mine in Alberta, which is expected to start production of 4.5 million mt/year in 2021, and CST Canada's No. 8 surface mine, which is in ramp-up mode to about 1.5 million mt/year, according to the Seaport report.
However, these additions would total around 6 million mt, compared with a total of about 13.1 million mt-14.1 million mt that may be lost from Teck and Cloud Peak.
For 2019, Westshore provided export guidance of about 29 million mt-30 million mt, with an average rate higher than in 2018.
