Teck’s coal problem

Elkview coal mine, Teck’s biggest, employs 1,200

It’s been a tough year for Teck Resources. But in the Elk Valley, people remain hopeful that coal–Teck’s bread and butter–will bounce back

For 20 days this past summer, the haul-trucks, draglines and belts of surface explosives went quiet at Teck Resources’ open-air coal pits in the Kootenays. The price of a ton of metallurgical coal—used in the production of steel—had fallen below $100 in the spring, down from $300 in 2011. In three-week shifts at each of its five mines—Fording River, Coal Mountain, Greenhills, Elkview, Line Creek—Vancouver-based Teck cut production by 1.5 million metric tons, representing around five per cent of the projected 27 million tons of metallurgical coal it expects to mine in B.C. in 2015.

While the size of the shutdown may seem insignificant, it signals broader troubles for B.C.’s dominant resource company—which cut dividends by two-thirds in 2014 and is facing an uncertain future in the wake of declining coal prices and a glut of product on world markets. Between 2013 and 2014, Teck’s revenues from its coal operations fell from $4.1 billion to $3.3 billion.

The fundamental problem Teck faces: it can’t produce coal as cheaply as its competition, and with declining prices, it’s proving uneconomical to do so. Australian coal giant BHP Billiton, for instance, was selling coal over the summer for $89 per ton; it costs BHP $71 to produce a ton of coal, whereas it costs Teck $83. Nor does it help that, as of April, Australia benefits from a free trade treaty with China that eliminates that country’s three per cent tariff on coal; Canada, without a Chinese trade deal, offers Teck no such advantage.

At a mining conference in April, Teck CEO Don Lindsay said that between four million and nine million tons needed to be taken off the market—before announcing Teck’s own effort to that end. While the company has made $366 million in cuts since 2012—both to its global workforce and planned equipment spending—it may not be enough to stem the bleeding. As he noted in a call with analysts a few weeks after that conference: “If the market continues to soften, we’re headed to more shutdowns or layoffs.”

The layoffs were the opening salvo in bargaining between Teck and its powerful unions, the United Steelworkers. All of Teck’s five-year agreements with its unions are either expired or set to expire this year, and union leaders worry that Teck will try to leverage their current situation to squeeze concessions from workers. As Alex Hanson, president of USW 9346, which represents workers at Elkview, puts it: “If Teck is signalling to the market that Henny Penny, the sky is falling, then workers will be more easily convinced that they should do the job for less money.” Contracts for the 1,200 workers at Elkview, the company’s largest facility, go up on October 31—and while Hanson’s local has yet to formalize its bargaining position, at Line Creek, Teck management is currently offering an increase of 1.5 per cent (below inflation), the ability to ignore seniority in choosing who gets to work in its coveted control rooms and a two-tiered system of benefits that would require new recruits to pay for their own.

According to other union leaders BCBusiness spoke to, Teck management has created this situation where it now needs to raise the spectre of layoffs. One example that’s offered: even as coal prices dipped in 2013, the company kept expanding production—posting a record year in 2014—in order to steal market share from mines near Tumbler Ridge owned by competitor Walter Energy. But now that Teck has the market share—a monopoly on Canadian coal exports—it can’t sustain the costs. “They were overproducing last year to knock off some of their competition—and now they’re showing empty pockets to workers,” complains Troy Cook, chairman of the USW 9346’s grievance committee.

While it remains unclear how long the pain will last—whether prices will rebound this year and permanent layoffs can be avoided—there are signs of hope in the Elk Valley, the heart of B.C.’s $3.5-billion coal industry. Currently there are permits for development or expansion for up to a dozen future sites, while an estimated $1 billion metric tons of coal sits just underground. In Sparwood, the largest town in the upper part of the valley, business leaders are cautiously optimistic that the good times will return—and soon—for the region of some 14,000 people.

“We’re all hopeful that the price of coal will turn around in the next six months,” says Norma McDougall, manager of the Sparwood & District Chamber of Commerce. “A lot of us have been here for a lot of years and been through shutdowns, mine closures and layoffs—but the town keeps bouncing back.”