Industry Trend Analysis - Regulations, Labour Challenges To Pose Downside Risk - JUNE 2016

BMI View: Colombia ' s coal production will continue to face headwinds from an increasingly stringent regulatory environment and growing labour unrest risks. Based on weak Q116 data, we highlight a downside risk to our coal production growth forecast for the year.

We maintain a positive forecast of 4.2% average annual growth for Colombia's coal production over 2016-2020, supported by the country's low operating costs and improving business environment. Colombia's coal production growth will outpace that of the US and Canada, as coal miners in these countries face increasingly stringent environmental regulations and elevated operating costs. Nonetheless, we highlight a downside risk to Colombia's growth outlook based on regulatory developments and labour risks.

Colombia's coal sector, long cast as regional growth bright spot for the coming years, will continue to face downside risks to production in the near term. In particular, heightened environmental concerns and labour unrest will elevate costs and disrupt operations for key producers. For instance, on May 14 2016, major coal mine Cerrejon - jointly owned by Glencore, BHP Billiton and Anglo American - suspended work on a project to divert a local creek, following a court order reflecting community concern about the impact. In Q116, Cerrejon's coal output fell by approximately 13%, from 9.0mnt in Q115 to 7.8mnt, according to Glencore's first quarter report, citing dust creation limits amidst an ongoing drought. Furthermore, Glencore's Grupo Prodeco unit, Colombia's third largest coal miner, reported a 20% drop in output for the first quarter due to a slow-down programme in response to the weak coal market. On March 16, Glencore registered an arbitration claim against Colombia with the International Centre for Settlement of Investment Disputes over a mining concession dispute at Prodeco.

Set To Outperform
Select Countries - Coal Mine Production Growth (% y-o-y)
e/f = BMI estimate/forecast. Source: BMI, Energy Information Administration

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