The benchmark, in other words, the market level of hard coking coal prices fell by 16% in Q2 to USD 120 per ton from USD 143 in the previous quarter, while semi-soft coal prices fell by 13.5% to USD 90 per ton. Particularly demanding mining and geological conditions in JSW’s mines, which suppressed the level of production compared to Q1, also accompanied the unfavorable price environment.
Even though the Company attained prices slightly above the benchmark prices for the coal it sold in Q2, replicating the sales prices from the previous quarter was not plausible. Blended coking coal prices fell by 7% in the JSW Capital Group, with the Company selling coking coal for USD 134 per ton on average. The Company also followed market trends concerning the price decline for steam coal. In this case, it contained the price decline to USD 1 compared to the overall market decline of USD 3 per ton. The double digit decline in prices on the coal markets, which was beyond the Company’s control, was the main driver of the net loss of nearly PLN 253 million in Q2.
Certain complicated mining and geological events unfolded in the Group’s mines in Q2, including coal seam splits and the emergence of hard rock and sandstone. This contributed to a lower level of production than in Q1. In Q2 JSW’s mines produced 2.48 million tons of coal, with three-quarters of that being coking coal, including nearly two-thirds of high quality hard coking coal. Coal production was 3.18 million tons in the previous quarter.
Production has accelerated strongly since July following intensification of work conducted under the surface. The level of inventories has also been reduced to 0.6 million tons from 0.9 million tons. The situation in the coke segment in Q2 was more stable than in the coal segment. The production volume fell slightly while the coke sales price (FCA) fell by more than 7% in Q2 compared to Q1.
“We had assumed that Q2 would be the most challenging quarter of this year because the decline in market prices was very extensive. Unforeseen, complicated mining and geological conditions limiting the pace of mining exacerbated circumstances. We have overcome these difficulties and production volume is returning to a robust level. We are operating in such a way so that this quarter and next quarter will allow us to achieve the run rate planned for this year, which will translate into a better result,” says Jarosław Zagórowski, CEO of JSW. “What is important is that at present coking coal prices have ceased to fall while we are focusing on strict cost control and on investments to produce the highest quality coking coal. This will allow us to enhance our results as soon as the anticipated improvement in market conditions starts.”
In pursuing its strategy of investing in high quality deposits, JSW signed the final agreement to buy the „Knurów-Szczygłowice” Hard Coal Mine on 31 July 2014. For JSW this means consolidating high quality coking coal in its Capital Group, expanding its resource base by 65% and ultimately ramping up its run rate to 18.5 million tons of coal per year starting from 2019.
The Knurów-Szczygłowice Mine produced 3.7 million tons of coal in 2013. Coking coal, in which JSW specializes, accounts for 38% of its production at present. It has 1 260 million tons of economically-viable resources of hard coal, which will enable the mine to operate for more than 80 years and considerably strengthen JSW’s position as a leading producer of coking coal across Europe.