With the recent London Mining (AIM: LOND) acquisition of the remaining 80% of the Colombian coal producer International Coal Company (ICC), attention turns to the potential opportunities available in this South American country, which London Mining hopes to take advantage of.
Colombia is well placed both geographically and structurally as far as the coking coal market is concerned, with an abundant amount of what currently stand as untapped and underdeveloped resources. The broader market looks to keep the physical prospects for coke tight, with ever increasing global steel production and ongoing demand in China, offsetting the more subdued decreases in demand from Europe. It is in this context that we will take a look at what Colombia has to offer those companies that look to take advantage of the coking coal opportunities in the country.
Coke is a solid fuel source derived, through a process of baking in an airless furnace known as coking, from raw coal (adhering to certain criteria such as low sulfur). This process removes the varying impurities (known as volatile constituents or volatile hydrocarbons) inherent in the coal by fusing together the fixed carbon and residual ash.
Too much or too little volatile matter in the coal will result in coke of a poor quality, and it is generally considered that 26-29% volatile matter is the optimum levels for coking. Unlike coal, coke produces little to no smoke when burned, making it ideal for domestic use as well as use in more confined, or less aerated areas. The primary use of coke however is as a reducing agent when smelting iron ore in the process of steel making. It is this industrial use that drives the coke market in modern times, with the strong links between steel demand and coke prices far outweighing the sliding domestic demand for this somewhat ‘old fashioned’ fuel.
When deciding to buy the remaining 80% of ICC, London Mining cited the fragmented and underdeveloped Colombian coking coal industry, as well as opportunities for current and future concessions and joint ventures, as the primary reasons they are expanding into the South American country.
Taking a look at current production levels compared to the estimated reserves in the country’s four main regions, we can see this belief is not unfounded. Data from the coal consultancy IHS McCloskey, shows that the Boyacá and Socha regions hold an estimated coking coal reserve of 860m/tn, but currently the estimated existing production in those areas is only 1.6m/tn. An estimated 702m/tn coking coal reserves are estimated in the Cundinamarca region, while only 1.4m/tn are currently being produced from the area.
Similarly, the Norte de Santander region has an estimated reserve of 245m/tn while the Santander area holds 158m/tn, but only 0.2m/tn are being produced in Norte de Santander while no discernable production comes from Santander. These all indicate a lot of potential to develop and increase the coking coal industry within the country, and IHS McCloskey go on to suggest that as the sector develops, even more reserves are expected to be identified.
As well as these underdeveloped and unutilized reserves, the disconnected nature of the current coking coal industry in Colombia also offers significant growth potential. Currently, ownership through the entire stream of coke production is fragmented in Colombia, with the majority of mines being small-scale and undercapitalized. Although there are a few major producers, including Acerias Paz del Rio (CB: PAZRIO) and Votorantim Participacoes (BZ: 1287Z), much of the current production is actually coming from small, specialist companies, which have an almost artisan or trade-vocational nature, naturally limited in the levels they can produce and the economies of scale they can take advantage of – in turn limiting their available investment into their concessions and infrastructure surrounding the industry in Colombia.
At the same time however, the quality of Colombian coking coal is very high, and is in fact one of few regions in the world to produce low volatility coking coal. This leaves undoubtable potential for a well financed and well organized producer to take advantage of the country’s coking coal potential, by expanding either through stand-alone operations, or joint ventures.
As highlighted, the current logistics for coke production in Colombia are somewhat constrained due to years of underinvestment, however there is still a firm infrastructure in place for those companies entering the market, with the potential for an expanded and more developed network as the industry expands.
Firstly, Colombia has a large trucking fleet available for the delivery of end products, combined with fairly competitive tonnage rates (London Mining for example will pay $50 per tonne in trucking costs, for the 1,000km journey from Socha to Atlantic ports). Port access fees are themselves competitive, at around $10 per tonne.
Another immediate and even cheaper option for coke delivery is the Magdelena River, flowing through the western half of the country to the Atlantic coast. London Mining have estimated the costs of shipping via the river as between $30 and $35 per tonne, depending on the level of ‘backhaul’, i.e. the possibility for the boats to bring cargo back on their return journey.
Finally an underdeveloped area of Colombian infrastructure, but one which with some investment, would be key for coking coal producers, is the country’s rail network. As it stands, both the Atlantic and Pacific railways in Colombia require significant material refurbishment and investment before they become a reliable delivery mechanism for coke producers, with a specific need to extend capabilities in the regions where coking coal mines and producers currently work.
Again taking London Mining as an example, their current ICC project stands 16km away from the nearest private rail extension, and 60km away from the national railroad. With some reasonable investment however, this network could be improved and extended over the medium to long term, providing another viable delivery system for any new coke producers.
One last area to consider, although no less significant, is Colombia’s geographical standing as far as global exports and delivery are concerned. The country is well placed for coke delivery on both Atlantic and Pacific routes, as well as more direct delivery to South and North American countries. The country is perfectly placed for direct shipping routes to the world’s two largest coking coal importers: China and the European Union. Currently the majority of the country’s coke is sold to US traders, but already some of the biggest end product purchasers are more globally diverse, including US Steel, Brazil’s CST and the UK’s Corus. As the global economic recovery brings with it increased demand for steel, and in turn increased demand for coking coal, Colombia’s global placement will allow coking coal producers entering and developing in the country the perfect opportunity to take advantage of these key links with the world’s largest coking coal importers.
Focusing on this somewhat overlooked South American country, it would appear the board at London Mining has seen the potential it offers to the coking coal industry early. A well financed and well led company could no doubt take advantage of the opportunities that Colombia has to offer coking coal producers, and with some investment back into the infrastructure and the country’s ill invested industry, the relationship would seem to be mutually beneficial, while highly profitable in the longer term for companies such as London Mining.