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Energy price rises stoke Colombia coal

Besides tumbleweed, little seems to move across the arid landscape of La Guajira, a region in northern Colombia renowned for bandits and smuggling.

But the desert silence is nowadays broken three times a day by a locomotive that snakes through the bush pulling hundreds of wagons brimming with Colombia's fastest-growing export: thermal coal.

Shipments of coal are rising fast, and could soon surpass oil as the South American country's top foreign exchange earner. Mining activities are expanding, and Colombia has become the world's fifth- largest coal exporter.

Cerrejon Coal, the country's biggest producer and the world's largest open-cast coal mining export operation, has seen its output levels double in the past decade and increase by 20 per cent alone in the past year.

It is partly due to improved security under President Alvaro Uribe, whose government has slashed the frequency of guerrilla attacks on infrastructure, helping overturn Colombia's negative reputation among some foreign investors.

"This was a wild part of a wild country," says Richard Cohen, Cerrejon's finance and administration vice-president. "But it has changed, and now the mine is a totally independent structure in the middle of the desert."

It is also the rise in global energy prices that has stoked coal's spectacular growth in Colombia and fuelled profits for Cerrejon, which accounts for almost 60 per cent of the country's coal exports.

Thermal coal prices have doubled from around $28 per tonne in 2000 to about $55 per tonne currently.

Prices for coal tend to track those of other sources of energy, such as oil and natural gas. Globally, some 700m tonnes per year of coal are traded, about 15 per cent of total world production of 5bn metric tonnes.

Cerrejon, owned in three equal parts by Anglo American, BHP Billiton and Glencore International, has tapped into the market by raising output.

The mine produced almost 26m tonnes last year, up from 17m tonnes in 1995.

Exploitation began in 1984, when Cerrejon began as a joint venture between Carbocol, a state-owned company, and ExxonMobil.

Glencore recently agreed to sell its 33.3 per cent stake in Cerrejon to Xstrata, a Switzerland-based mining company, for $1.7bn. Glencore is itself a major shareholder of Xstrata.

David Rough, Xstrata's deputy chairman, told shareholders that the acquisition would provide "competitive entry" to the US market and "significant potential" for operational growth.

Colombian coal is particularly attractive because it is high in energy and has a low sulphur and ash content.

Colombia is Latin America's fifth-largest oil producer, but the country is expected to turn from a net oil exporter to importer by 2008 if it is unable to discover new oil fields.

"Coal has become a very important source of revenues for the country as oil production continues to decline and oil prices increase, lifting with them prices of coal," says Roger Tissot, director for Latin America at PFC Energy, a Washington-based consultancy. As a source of energy, thermal coal could theoretically fill part of Colombia's domestic energy gap, for example to fuel power stations. But for now, it is predominantly an export product.

All of Cerrejon's production is destined for overseas, most of it placed on a spot basis in the Atlantic market, 59 per cent of which is in Europe.

South Africa also supplies the Atlantic market, while Australia, China and Indonesia the world's other top exporters mostly supply the Pacific market.

The US Energy Information Administration estimates that the world has about 1,000bn tonnes of recoverable coal reserves.

Some 930m tonnes of reserves are estimated to remain in the Cerrejon site. The mine produces one tonne of coal from seven cubic metres of raw material, a measure that engineers call the "strip ratio".

Cerrejon made a pre-tax profit of $727m in 2005, 15.6 per cent more than in 2004. Almost 75 per cent of royalties, which totalled $106m last year, are paid directly to the provincial government and to local municipalities.

Cerrejon has a custom-made railway that runs 150km to Puerto Bolivar, a dedicated terminal that can load up to 5,400 tonnes of coal per hour. On average, one vessel of up to 180,000 tonnes berths and sets sail every day.

Despite its size, the mine's infrastructure is operating near capacity. Cerrejon is aiming to export 32m tonnes per year in 2008.

For Mr Cohen, environmental concerns will not pinch market growth. "Coal is still the cheapest energy source by far," he says.

SOURCE: Andy Webb-Vidal (2006, July). Energy price rises stoke Colombia coal

By platano on Jul 11, 2006, 20:33 in Politics & the war.

tejasmarcos says on Jul 12, 2006, 07:52:

interesting story here platano. in the wake of diminishing oil reserves and global energy concerns, is there a possible market play with this company are they publicly traded?

trying to walk a straight line on sour mash and cheap wine...

0 funny, 0 helpful.