Colombia Bans Coal Loading by 2nd-Biggest Producer Drummond

Jan 09, 2014 12:39 pm ET

(Updates with Rotterdam Port comment in 16th paragraph.)

Jan. 9 (Bloomberg) -- Drummond Co.’s shipments of coal from Colombia, Europe’s No. 2 supplier, to international buyers including Electricite de France SA are suspended until the producer finishes mandatory port enhancements to avoid spills.

European coal prices rose as much as 3.6 percent, the most since Oct. 24, as Colombia’s second-biggest producer was ordered to stop loading ships at its Caribbean port until a conveyor- belt system replaces the current arrangement of barges and cranes. Drummond estimates its direct loading system will be in place by March.

“We know this is a very costly decision from a royalties point of view, but what’s at risk is the country’s environment,” Environment Minister Luz Sarmiento yesterday told reporters in the city of Santa Marta. “If they don’t do things properly, we’d prefer not to have this money, and they have to learn that Colombia must be respected.”

Colombia, which supplies about a quarter of Europe’s coal imports, introduced new rules Jan. 1 requiring producers to load coal directly onto ships. Other producers of Colombian coal, including BHP Billiton Ltd. and Glencore Xstrata Plc, met the deadline, while Drummond continued to load by barge this month.

If Drummond can’t export for two months, lost shipments may be as high as 4 million metric tons, or about 15 percent of the company’s deliveries from the nation last year, according to Paolo Coghe, an analyst at Societe Generale SA in Paris.

Storing Coal

Logistical obstacles will prevent Drummond from exporting coal through other Colombian ports, Mines and Energy Minister Amylkar Acosta said in a telephone interview from Bogota. Drummond has the capacity to store about 1 1/2 months of its output, Acosta said.

“Once this storage is full, they’ll have to halt production,” he said.

Drummond will be allowed to load coal it has in barges right now onto ships, a process which should take three or four days to complete, Sarmiento said.

Drummond didn’t reply to a voicemail seeking comment after the port ban was announced. The Birmingham, Alabama-based company’s press office didn’t return phone calls prior to the announcement. EDF declined to comment in an e-mailed response to questions.

European coal for next-month delivery rose as much as $2.95 to $84.45 a ton, according to broker data compiled by Bloomberg. It closed at $83.50 today in London.

Paying Fine

“While the minister’s statement was a stark reminder that the Colombian government is in the driving seat, and has put safeguarding the environment ahead of exacting royalties, for the time being Drummond is allowed to continue to load coal exports and pay a fine,” Coghe said today be e-mail. “All in all the price/volume impact will be limited both in time and magnitude.”

Colombian President Juan Manuel Santos, who’s bidding for a second term in office in May elections, sent Sarmiento to Santa Marta to investigate Drummond’s loading operation.

Colombian authorities fined Drummond $3.6 million last year after a sinking barge dumped about 500 tons of coal into the Caribbean. The company will face another fine for violating the new rules this month, Sarmiento said.

Drummond’s failure to meet new ship-loading rules has drawn criticism from lawyers and activists. The shipping suspension follows a 53-day miners’ strike over pay last year that prompted coal prices to soar in Europe.

Rotterdam Port

A further halt in exports “would be supportive of prices because it will take supply out,” Trevor Sikorski, the head of natural gas, coal and carbon at Energy Aspects Ltd., a consulting company in London, said by phone.

Drummond exports about 80,000 tons of coal a day, according to Hugo du Mez, a business developer for dry-bulk shipments at Port of Rotterdam Authority, Europe’s largest receiving facility.

“It is just hard to imagine they will really be closed for three months,” he said. “So in worst case scenario impact could be as high as some 7 million tons of lost exports.”

Colombia is the biggest supplier of coal to Europe after Russia, according to the latest data from Euracoal, the industry group. In past months, coal prices in Europe have been damped by a global oversupply. The surplus will swell by 20 percent to 6 million tons this year, according to Credit Suisse Group AG.

Colombia’s top producer Cerrejon, jointly owned by BHP, Glencore and Anglo American Plc, has completed its system for direct loading of coal.

--With assistance from Mathew Carr, Rachel Morison and Lars Paulsson in London. Editors: Lars Paulsson, Alaric Nightingale