May 28 (Bloomberg) — Colombia’s plan to dredge its biggest river could boost coking coal output fivefold, according to the government agency overseeing the project, potentially exacerbating a global glut of the steelmaking ingredient.
Ecopetrol SA and Pacific Rubiales Corp., the country’s two largest oil producers, are also supporting the Magdalena River dredging project, Augusto Garcia, who heads the agency known as Cormagdalena, said in an interview.
The project is designed to reduce the cost of transporting commodities and other goods to the Caribbean coast and is loosely modeled on a 19th Century engineering project in the Mississippi River that helped boost the U.S. coal industry. The agency will select a group in July to dredge 560 miles of the 950-mile river, with work scheduled to start next April.
“The Mississippi River is definitely an inspiration,” Garcia said in a May 22 telephone interview. “The decision taken more than a century ago by a few North Americans permitted the development of a vast zone of the country.”
In May, Colombian President Juan Manuel Santos pledged 2.5 trillion pesos ($1.3 billion) for the river project, saying it would cut coal and oil transport costs by as much as 50 percent.
Colombia produced 857,000 tons of metallurgical coal in 2013, and 272,000 tons in the first quarter of 2014, according to the national mining agency. Producers include Gerdau SA’s Coquecol SA CI, with Brazil and India among the main export markets.
Gerdau, Latin America’s largest steelmaker, generates 35 percent of its coal from Colombia, the Porto Alegre, Brazil- based company said in a presentation yesterday.
A first section of the river from Barrancabermeja to the port of Barranquilla will be ready by mid-2015, cutting barge travel times between the two cities to three to four days from seven to 10 days, and helping domestic companies to compete in global markets, Garcia said.
A second stretch of the river, from Puerto Salgar to Barrancabermeja, which is largely unnavigable today, will be ready by 2019, assisting metallurgical coal producers in the central Colombian provinces of Cundinamarca and Boyaca to reach the seaborne market, Garcia said.
“Today it costs a lot to transport and so it’s not being mined,” Garcia said.“We could increase production to 5 million tons per year if we had more transport options.”
The river project is attracting infrastructure companies to Colombia. Trafigura Beheer BV is investing more than $800 million in a port and barge transport system to export oil and coal, Managing Director for the Americas Thomas Savage said in April
Ecopetrol is helping finance the dredging and maintenance of the Magdalena and expects to see a 40 percent increase in the 8 million barrels a year it transports along the river, the state-owned company said in an e-mailed response to questions.
The oil producer has a refinery at Barrancabermeja and uses the river to transport oil derivatives including gasoline and diesel, the company said.
Pacific Rubiales is “very interested” in using the Magdalena after the dredging project to export crude and import diluents and help reduce transportation costs, the company said in an e-mailed response to questions.
The cost of coking coal, used in steelmaking, has dropped 13 percent this year, according to Energy Publishing Inc., squeezing producers’ margins.
“Today the metallurgical coal market is still experiencing a large oversupply,” Sanford C. Bernstein & Co. analyst Ignace Proot said yesterday in an interview from New York. “The positioning of producers on the cost-curve and the quality of their coal is very important to success.”
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