Teck Coal September 26 alerted all employees of possible job losses and the implementation of a cost reduction program in order to stay ahead of a rapid downturn in the global market.

In a letter to all coal employees, Robin Sheremeta, SVP, Coal, Teck Resources Limited stated, “Many of you are aware of the current downturn in commodity pricing generally and most recently, the severe downturn in coal pricing. Over the last few weeks, the price of coal has plunged from $210 per tonne to $130 per tonne. Not only is the magnitude of the decline substantial, but the rate of the decline is unprecedented; we have lost 80% of our margins in just four months with no end in sight. As a result, our organization is taking steps across all of Teck to protect the business through this uncertain time.

“Every experienced coal miner knows that a positive market like the one we’ve been in the last three years, never lasts forever and that we will eventually need to manage through a downturn. That is the nature of our business. Those downturns persist until either supply clears from the market or demand increases. The previous downturn occurred gradually over five years and it was largely driven by oversupply,” Sheremeta said.

“Unfortunately, with the US-China trade war, Brexit and a host of other world issues, this downturn has materialized much faster. World economies are in a synchronized global slowdown and that is fundamentally impacting demand for all of Teck’s products, most recently coal.”

Teck is taking a number of steps across all areas of the business to stay competitive through this period, the company reported.

“In coal, we know that we face a structural gap with competitors in Australia due to the logistics advantage they have. One way Teck is closing this gap is by investing in the Neptune expansion that is currently underway. We also know that the operational gap has grown over the last three years as our strip ratio and haul distances have increased and we have tried to maximize production in what has been a very strong market. We now need to close that gap in our operating costs or we will become uncompetitive and struggle to generate positive returns in this market,” outlined the letter to employees.

Company president Don Lindsay issued a memo this week to senior management across Teck that addressed the issue.

Here are excerpts from that memo that are relevant to coal:

“I assume all of you will have seen the very steep acceleration in the decline in coal prices on Friday. The coal price is now down about US$80/t in the last few months which reduces our EBITDA (earnings before interest, taxes, depreciation and amortization) run rate by about C$2.7 billion. When combined with already weak copper and zinc prices and significant cost increases since the last cyclical trough due to structural strip ratios and increasing haul distances, etc. we are now at a point in the cycle that is close to what we experienced in 2015. While the commodity prices themselves are not quite as low, the increased costs drive the actual margins to something close to what we experienced at that time,” he stated.

Accordingly, Teck is going to have to move quickly to implement its cost reduction program, he continued.

“In the last down cycle, which lasted five-years, we became quite proficient at CRP and in fact implemented three different versions over those years, the last with the help of outside consultants/change agents. This time the commodity price decline has been so steep with nothing in sight that would likely end it that we don’t have the luxury of edging our way into the cost cutting effort. We will need to go directly to the equivalent of CRP3.

“As we go through this process you can assume that there is an immediate hiring freeze in place, that salaries are frozen save for a very few exceptions, that all ‘job vacancies’ are cancelled, that travel will be severely limited, training reduced or deferred, projects declined or halted, equipment parked, sustaining capex cut, etc. And yes, sadly, there will be job losses involved. However, notwithstanding what we need to do on our general cost structure, we will need to maintain production levels.”

Sheremeta pointed out that Lindsay’s memo “makes clear to all what the expectations are of us in coal and we must be prepared to challenge ourselves to make do with what we have, be efficient and control our spending. Our leadership teams will be discussing this much more over the next few days and weeks and we will establish specific programs for coal but for now, know that our operating strategy through Q4 (fourth quarter) must reflect this current environment and Teck Coal will be applying these guidelines to our planning as we go into 2020.

“Again, we have been here before and I have tremendous confidence in the capability of our teams to manage through difficult times. The strength of coal is that whatever challenges are thrown at us, we keep each other safe and healthy and we focus on what we are good at…safety, productivity and costs.”

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