The adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) of the coal business of major Brazilian mining group Vale came to $46-million during the third quarter of this year (3Q17), the company announced in its report, ‘Vale’s Performance in 3Q17’. To all practical intents and purposes, the group’s Coal business is now synonymous with its Moatize operation in the Tete province of Mozambique.

The $46-million figure is $111-million lower than this year’s second-quarter (2Q17) Ebitda of $157-million. The company stated that this was “mainly due to: (i) lower realised prices ($97-million), impacted on by provisional prices set in 2Q17, which considered stability in future price environment, and were later adjusted by lower realised prices upon cargo delivery in 3Q17 and (ii) higher tariff costs in the Nacala Logistics Corridor ($80-million), which were partially offset by (i) the provision of the Nacala Logistics Corridor’s debt service to Vale ($67-million) and (ii) lower costs at the mine and plants ($16-million).”

Moatize produces both metallurgical, or coking, coal and thermal coal, with metallurgical coal being its main product. Regarding metallurgical coal, net sales revenues in 3Q17 were $266-million, down from $414-million in 2Q17, because of both lower sales prices ($111-million) and lower sales volumes ($38-million). On the other hand, thermal coal net revenues increased from $67-million in 2Q17 to $94- million in 3Q17. This was the consequence of both increased sales prices ($13-million) and volumes ($14-million). The mix of coal sold during 3Q17 was 59% metallurgical and 41% thermal. The group expects that metallurgical coal’s share of the mix will return to the 60% to 65% range.

For 3Q17, the prices for metallurgical coal were based on a quarterly index benchmark (14%), on lagged index prices (31%) and fixed prices – spot shipments and trial cargoes (55%). “The metallurgical coal realised price decreased $59.3/t from $201.1/t in 2Q17 to $141.8/t in 3Q17, mainly due to: (i) negative adjustments on provisional prices set at higher levels in 2Q17 but realised at lower levels in 3Q17 versus the opposite effect in 2Q17 ($20.9/t); (ii) higher exposure to spot with lower prices in 3Q17 in markets outside China versus the opposite effect in 2Q17 ($12.1/t); and (iii) lower lagged prices in 3Q17 versus the opposite effect in 2Q17 ($12.0/t).”

Regarding the thermal coal prices, for 3Q17, these were based on fixed prices (18%) and index prices (82%). The realised thermal coal price was $73.8/t in the third quarter, which was 16.4% up on the 2Q17 price. This increase was in line with the rise in the reference index in the same period.

“Price indexes have been extremely volatile since the end of 2016,” noted the miner. “This behaviour, associated with our pricing system, caused significant variations in all realised quarterly prices in 2017. However, the ratio of our 9M17 (first nine months of 2017) realised price and the year-to-date average of Platts PLV (premium low volume) HCC (hard coking coal) was 94%, smoothing the effect of volatility and reflecting the fair value of our product portfolio.”

Various factors affected the prices realised by Vale for both its metallurgical and thermal coal. For metallurgical coal, these factors included that sales were not spread evenly across the quarter, which reduced prices by $4.3/t; sales were made with provisional prices in 2Q17, which were then adjusted downwards in 3Q17, which cut prices by $11.6/t and freight price differentials between what Vale contracted with the customer for and what what the miner had to pay, which eroded the prices by $0.2/t. There were also three other factors: “quality adjustment over the index reference price due to different product characteristics, as well as value in use adjustments associated with ash content, which negatively affected prices in 3Q17 by $2.2/t; sales using fixed prices (spot shipments and trial cargoes), quarterly benchmarks and lagged index prices which negatively impacted on prices in 3Q17 by $18.8/t, partially due to the strong trialling campaign and prompt sales outside China, where the market was not as tight as the Chinese market in 3Q17; [and o]ther adjustments, including penalties (related to moisture and ash content), which negatively impacted on prices in 3Q17 by $9.9/t”.

The factors affecting the prices obtained by the group for its thermal coal were, on the downside, adjustments in quality because of lower calorific values and higher ash levels (against the reference index), which cut prices by $14.3/t; and shipments using fixed price and lagged index prices, which reduced prices by $1.0/t; on the upside, the uneven spread of sales across the quarter increased prices by $0.5/t, and sales made with provisional prices in 2Q17 had their prices adjusted upwards in 3Q17, increasing prices by $0.6/t. Freight differentials also benefited the thermal coal prices realised, by $0.1/t, as did “other adjustments, mainly commercial premiums/discounts” which added $1.0/t to the prices.