BOGOTA (Reuters) - Colombia, the world’s fourth-largest exporter of coal, faces a potential spending crunch in 2020 as royalties from the fuel decline amid a supply glut and slowing economic growth in China.
The fuel provides some 80% of the Andean country’s mining royalties, totaling hundreds of millions of dollars in income each year, and is the second-largest generator of foreign exchange behind oil.
Government data shows coal exports fell by 18% in the first half of the year, to a value of $3.6 billion. Prices for thermal coal have fallen about 37% since the start of the year and that will affect royalties, which are calculated six months in advance and therefore lag behind price changes.
A decline in royalties could hurt planned investment by President Ivan Duque’s government, which is already grappling with congressional resistance to economic proposals, expensive post-conflict social programs and low approval ratings.
“If this trend of falling prices continues there will be a reduction in royalties that we would see reflected more toward the beginning of next year,” Vice Minister for Mining Carolina Rojas said on the sidelines of an event this month.
Coal companies paid 1.87 trillion pesos, about $555.8 million, in royalties in 2018, according to the private Colombian Mining Association. Royalties were going strong at 1.1 trillion pesos in the first half of 2019, according to the energy ministry, reflecting the lag in payments.
Colombian coal companies have said they anticipate steady production, but the mining association said this month that output will likely fall to 80 million tonnes in 2019, from 84 million last year.
“We are monitoring it because it would have an impact on all the investments that are associated with royalties and resources and the rest,” Vice Minister Rojas said.
Ratings agencies Fitch and Moody’s have warned that the Andean country’s credit rating is at risk of being cut, with Moody’s citing high debt levels and the need to boost tax revenue.
Slowing economic growth in China, the world’s biggest market for coal, is weighing on expectations for demand for thermal coal, while a global trend toward cleaner energy is compounding a supply glut.
Hot weather has also been a factor in lower production, as heat increases coal dust and forces mines to produce less to comply with environmental regulations.
The government will struggle to find replacements for the royalties, said analyst Sergio Guzman of Colombia Risk Analysis.
“It doesn’t really have a concrete plan to replace hydrocarbon incomes,” said Guzman. “In the short and medium-term there’s very little the government can actually do to replace these incomes other than fracking and offshore oil hitting the jackpot.”
The finance ministry did not respond to a request for comment.
Colombia suffered through a sharp, $80 million fall in royalties between 2015 and 2016, which came in tandem with a global plunge in the price of oil, the country’s most important export.
The government’s two-year royalty plan for 2019 and 2020 anticipates 3.28 trillion pesos in payments from miners, of which coal accounts for about 80%.
Reporting by Julia Symmes Cobb and Nelson Bocanegra; Editing by Tom Brown