Industry Trend Analysis - Coal Production & Export Risks Ahead Of May Election - FEB 2014

BMI View: We believe that the Colombian government's ban on Drummond 's coal shipments signals a toughened regulatory environment for coal miners ahead of presidential elections in May 2014. While we maintain that Colombia's domestic coal production and exports will continue to grow in the coming years, miners are likely to find themselves under increased short-term scrutiny as President Juan Manuel Santos balances domestic economic growth with increasing calls to rein in pollution and other environmental degradation resulting from the country's massive coal industry.

We believe the recent Colombian government decision banning coal exports by US-based Drummond, rather than granting a temporary waiver, indicates coal miners will find themselves under increased scrutiny in a tense election year. Colombia remains the world's fourth-largest thermal coal exporter, with over 90% of domestic production exported to buyers in the US, Europe, and Asia. Drummond had sought a waiver by the government allowing it to continue loading coal out at sea using cranes and barges until its direct loading conveyor belt system is completed in March 2014, two months after the required deadline for switching over. Drummond's old system resulted in various coal spills in a country with high environmental sensitivities, with one such spill in January 2013 in the port of Santa Marta leading to a fine of US$3.5mn. The export ban led Drummond to declare force majeure until exports can resume in March.

The Ministry of Environment led the government to withhold even a temporary extension to Drummond, which should lead to total coal exports falling in Q114 and reduce revenue for the Colombian government. We believe the move is largely politically-motivated, with President Juan Manuel Santos seeking to affirm his commitment to holding major miners accountable for pollution violations. Similar to Chile and Peru, mining activities in Colombia have attracted protests due to environmental damage, and despite its growing importance to the Colombian economy, various domestic constituencies remain suspect of mining sector expansion.

Santa Marta To See Q114 Delays
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