Signal Peak Energy, which runs a bituminous coal mine in Montana, named Parker Phipps as its new chief executive in February. Steve Read is the president of Global Coal Sales Group, a subsidiary of Global Mining Holding Company. Global Coal Sales is focused on marketing the bituminous, thermal coal mined by its affiliate Signal Peak Energy. In this interview, edited for length and clarity, Phipps and Read discuss the prospects for US coal, given the level of global demand since Russia's invasion of Ukraine.
How much coal is the mine expected to produce this year versus last year?
Phipps: We are still restricted by how much coal can get shipped out via the rail. The picture this year compared to last year is kind of the same for us from a mine aspect. We are still producing in that 7mn-8mn [short] tons range. [In 2021] we were utilizing the longwall on a five day per week schedule but with the increased production in 2Q we are now running it seven days per week.
Read: We have our customer base that we want to take care of. And irrespective of the market, we would be targeting this kind of volume.
Phipps: 2020 was down for everybody, and we shipped and produced 6mn st. And then last year we were at 7.2mn st. This year we are hoping to be over 8 [mn st]. But if you look at 1Q of this year, we were only at 1.49mn st. So, we were on pace for 6mn st this year through 1Q, and things really picked up in 2Q with the mine producing 982,000st in June.
Read: But the shortfall situation in 1Q was 100pc transportation related.
Phipps: We can stockpile about 400,000 clean tons of coal at our mine, and that pile was full.
Read: BNSF, like every Class I railroad in the US, has really struggled with workforce, crew-related issues. Post-pandemic, demand came back much quicker than expected, which really showed in rail performance, especially starting in late December of 2021. We have worked closely with both BNSF and our customers to defer vessel shipments until later in the year to provide time to recover. BNSF continues to struggle with crew issues, particularly in the Pacific northwest, but we are seeing some improvements as a result of running longer trains, mercenary crews relocated to positions of most need.
Parker, when you came to Signal Peak what was your first impression?
Phipps: Signal Peak has a world class deposit: the reserve and the mining conditions are ideal, and this is what you want when you are running a mine.
There were some cultural issues where there were some needed changes in management, and those changes came. Some of them came right away and some came 6, 12, 18 months down the road. But over the course of the last 2½ years, we had to modify the management team and make it what it is today. Overall, we have got a pretty new management team that is in place right now.
Did you have to make changes?
Phipps: I don't think anybody predicted the market would be this strong this fast. We have been able to increase production and, and even though in my mind, they're kind of incremental compared to where we were. But we have had to just make minor tweaks here at the operation. The mine is set up to be a high-volume operation with good capital infrastructure that was designed to handle this. So, for us, it was just minor tweaks. Picking up additional shifts of scheduled mining. Setting up our production to meet vessel schedule that Steve has got.
Did you hire more people?
Phipps: Since 2020, we have probably reduced headcount by close to 50 and increased production.
What is the biggest challenge for Signal Peak?
Phipps: I think the problem that we have here at Signal Peak is common with every coal producer or every energy producer. And it is just fighting off litigation. There is environmental litigation from all sides.
In April a US appeals court criticized the Bull Mountains mine expansion review. What might the legal impasse over the mine expansion plan mean for the company?
Phipps: Struggle with that word "expansion."
Where is the boundary now?
Phipps: The current mining district is approved for longwall mining through 2030 and we are actively permitting addition mining districts to extend the mine life beyond 2045.
What are your thoughts on production costs and inflation this year?
Phipps: The biggest ones for us have been steel and chemicals. Those are the two main categories that have had hit the bottom line the hardest. We have seen substantial increases particularly in steel products and cable prices. Some things have doubled in the last 12 months.
US coal producers were able to ramp up exports in 2021. Would you expect US coal exports to maintain the pace this year?
Read: I think they will struggle to meet the 2021 levels because of all of the nationwide rail logistics issues. I think it will take them until 2023 to get back to similar levels as 2021.
What is the impact of the Ukraine conflict on global coal supplies?
Read: The Russians are going to be international pariahs for years. A lot of that coal is going off the market. It could be a hundred million [metric] tonnes that disappears from the export market. The Germans, for example, they have completely rethought their energy portfolio and their strategies.
Other market participants report seeing a shift in trade flows given the geopolitical tensions around Russia and Ukraine.
Read: There's definitely much more interest in source diversification. When Indonesia basically decided overnight in late December not to export coal in January due to low domestic inventories, it really caught our customers by surprise. And the Japanese and the Koreans have begun excluding Russian coal on tenders recently.
Last year, Russia was the third-largest supplier to both Japan and South Korea. Russia was about 20mn t out of 183mn t in Japan and 22mn t out of 126mn t in Korea. Those tonnes, I think, will go away. Russian coal going into Asia is going to go down dramatically and I don't think it is a short-term issue. Our customers are looking for sources of stable, reliable coal supply with consistent quality.
Global coal-fired generation rebounded strongly in 2021. Do you expect more increases this year?
Read: Yes. I think, the current situation is best described as a perfect storm situation. There are a lot of variables, not only in Europe, but talking more coal on the Asian side too. China's imports are still forecast to grow. Indian thermal coal consumption is going through the roof. Indian thermal demand is supposed to be up to be at 1.45bn t by 2030, which is up 48pc from 2022. And Indonesia's doing the same thing. Its domestic demand is growing significantly also.
What are your thoughts on western coal exports, given not only the state of the market in Asia but Canada's commitment to stop exporting thermal coal by 2030?
Read: If they were to stop exporting us thermal coal, it would not impact a single tonne of coal being burned in the world. I think the right way to look at 2021 Pacific demand: Total Pacific demand was 846mn t, with 50pc of that was Indonesia, 25pc of that was Australia, and about 13mn t of that was the USA via Canada. That is 1.5pc of Pacific demand.
Phipps: Now, that it is not going to change the greenhouse gas picture.
Read: Those shortfalls of tonnages will be picked up by most likely the biggest exporter in the world, which is Indonesia, and its coal quality is significantly lower than ours. So for every ton of Indonesian coal that you ship to replace a ton of Signal Peak coal, if Canada were to ban exports, you are going to have to ship 1½ or so tonnes to meet the same heat value.
