By Gavin du Venage

The Valley of a Thousand hills gets its name from the endlessly rolling countryside that dominates South Africa’s north eastern corner. Tourists flock to it, drawn to its wild greenery and to dip into its bloodied history of battles between British troops and Zulu warriors, of Boers versus Brits, and Boers against the Zulus.

It’s across these hills that trains a mile and a half long must crawl, hauling 200 wagons of coal at a time. At any given time a section of the train is going up, another section down, and still another part is climbing upward again. “It’s like a very long centipede crawling over an egg punnet. It’s slow and an accident can happen at any time,” said Abri Claasen, a long time driver on the route. “The job is as difficult as piloting a Jumbo.”

The trains labor between the dozens of mines on the coalfields of the Highveld in the north, and Richards Bay, the world’s largest coal terminal, in the east. The 580-km line is symbolic of the position the South African coal industry finds itself in today, faced as it is with as many ups as there are downs.  With all of these difficulties, it still has to serve a growing export market as well as supply South Africa’s own voracious need for energy.

The country is by no means the largest producer in the world—it ranks sixth (behind China, U.S., India, Australia and Indonesia), according to a study by Anton Eberhard, head of the Management Program in Infrastructure Reform at the University of Cape Town’s Graduate School of Business. However, it is one of the cheapest producers, and still has vast untapped reserves and the potential to substantially expand its exports.

Economically recoverable reserves are estimated at anywhere between 15 billion and 55 billion metric tons (mt), of which 96% is bituminous coal. This picture could change, however, as extensive exploration in the Waterberg region in the north of the country points to substantial reserves of coking coal. For now most production is in the Central Basin around the towns of Witbank, Vryheid and Ermelo.

This region is mature and is expected to peak within the next decade; already some of the older deposits are being mined out. What makes the region’s coal seams attractive is that they are relatively thick and close to the surface, making for as ideal mining conditions as they can get. A quarter of the bituminous reserves lie between 15 m and 50 m below the surface. Most of the rest lie somewhere between 50 m and 200 m. More than one-half the seams are up to 6-m thick.

As a result, production is evenly split between opencast and shallow underground mines. Ash content is high and exported coal usually requires washing to keep this below 15%. Because the mines are aging, calorifc values have also declined somewhat: from 26 megajoules per kilogram (11,177 Btu/lb) a decade ago, to 24.7 MJ/kg (10,619 Btu/lb) currently, noted Eberhard. The sulfur content ranges between 0.6%-0.7%.

The thermal coals used for domestic power and synthetic fuel production have a much lower calorific value, and higher ash content. These were generally seen as too poor a quality to export, and reserved for the local power utility, Eskom. However, in recent years demand from foreign buyers has grown. India in particular has purchased large quantities of low-grade coal as its power plants, like those of Eskom, burn high-ash coals.

Duff, or discarded coal, is mounting up at a rate of 60 million mtpy, to a cumulative stockpile of around 1 billion mt. There has been talk of turning discarded coal to energy production, using fluidized bed combustors. This seems increasingly unlikely, however, as Eskom has committed substantial capital on thermal coal generators and is moving ahead with large-scale nuclear and renewable generation. So as the clock ticks on the country’s stretched energy supply, Eskom will have neither the time nor the money to toy with technology outside of mainstream thinking.

In spite of its size, the South African coal industry is not a happy place right now. A slew of legislative changes are gathering like clouds on the horizon.

“The real problem we are having at the moment is that we are waiting for the government to make many decisions,” said Xavier Prevost, an independent coal analyst and one of the leading advisers to the industry in the country. Tax changes and the possibility of declaring coal a strategic resource, which could restrict exports and channel production to local power stations, are among the issues weighing on investors.

“Making coal a strategic resource is not in itself bad—or good,” Prevost said. “But people wanting to invest in mines need a big injection of capital. This is not being made available because of the lack of decisions.”

As a result, companies are hanging back, or directing their capital toward countries beyond South Africa’s borders. Prevost said new projects have stalled because of legislative dithering.

“I’m aware of 20 to 30 projects that are not doable. This is not because they are bad projects, but because of the uncertainty. And mines have a long lifespan. Investors are looking at up to 30 years for a project. If the government makes the wrong decision it will kill the investment.”

The Big Five
Five majors produce more than 80% of the country’s coal from eight super-mines that dig up more than 10 million mtpy each—the other 20% coming from various smaller operations.

The largest is Anglo American’s Thermal Coal division, with nine mines in the country. Four of these—Goedehoop and Greenside, which are opencast, and underground operations at Kleinkopje and Landau—are in the Witbank area. These produce mostly thermal coal for export.

Anglo also runs three mines for Eskom—the Kriel and New Denmark mines in Mpumalanga Province, and the New Vaal mine at Vereeniging in Gauteng Province. These are run on cost-plus, long-term contracts supplying 30 million mtpy of thermal coal to Eskom. The utility takes up 62% of Anglo’s South African production.

It has a 50% interest in the Mafube colliery and Phola washing plant. Six of the mines collectively supply 22 million mtpy of thermal coal to both export and local markets.

The New Vaal, New Denmark and Kriel collieries are domestic product operations supplying 30 million mtpy of thermal coal to Eskom. Isibonelo mine produces 5 million mtpy of thermal coal for Sasol Synthetic Fuels, the coal-to-liquids producer, under a 20-year supply contract. Sasol uses around 8% of Anglo’s production.

Anglo American Inyosi Coal, a broad-based black economic empowerment (BEE) company valued at approximately $1 billion, is 73% held by Anglo American; the remaining 27% is held by Inyosi, a BEE consortium led by the Pamodzi and Lithemba consortia (66%), with the Women’s Development Bank and a community trust holding the remaining equity. Anglo American Inyosi Coal, in turn, owns Kriel colliery, the new Zibulo multiproduct colliery and the greenfield projects of Elders, New Largo and Heidelberg.

Around 28% of Anglo Thermal Coal’s production is exported through the Richards Bay Coal Terminal, in which it has a 24.17% shareholding, to customers throughout the Med-Atlantic and Asia-Pacific regions.

Exxaro is the second largest coal producer in the country, with a capacity of 47 million mtpy. It has 11 managed mines that produce power station, steam and coking coal as well as char. All of its production goes to local power production.

Exxaro is busy with the Grootegeluk Medupi expansion project (GMEP) in the northwest, which will supply Eskom with 14.6 million mtpy for the 4,800 mw coal-fired Medupi power station, also under construction. Medupi is a dry-cooled, coal-fired power station which, when completed, will have six boilers each powering an 800 mw turbine, producing 4,800 mw of power. It is expected to become the largest dry-cooled, coal-fired power station in the world. Medupi itself is running two years behind schedule, and it looks as if it may slip even further behind. This will certainly impact GMEP’s production output for the coming year, as it waits for its main client to issue first steam.

The company has not escaped the rolling labor unrest that has beset much of South Africa’s mining industry. In March, strikes stopped work at six of its 11 coal mines. Exxaro supplies one fifth of Eskom’s generation and it was feared the strikes would collapse the country’s already fragile energy supply chain.

Sasol is the odd puppy in this litter. The company’s primary focus is turning coal to petroleum and other chemical products, using the Fischer–Tropsch process. It provides about one-third of South Africa’s fuel needs, and is rapidly expanding into gas and other fossil fuel derivatives. Mining is therefore a secondary activity, but with production running at 44 million mtpy, an important one nonetheless.

Its subsidiary Sasol Mining is the third largest coal producer; most of this feeds the Secunda complex of coal-to-liquids plants. Sasol is now the second-largest domestic consumer of South Africa’s production, but also exports some of its production through Richards Bay.

Sasol had planned an 80‚000 barrels per day coal-to-liquids plant in Limpopo Province in the north, but dropped the idea in 2010. However, it recently indicated it is once again looking at coal mines in the area, to supply other users, possibly Eskom.

BHP Billiton Energy Coal South Africa is South Africa’s fourth-biggest coal producer and holds a 37.43% stake in the Richards Bay Coal Terminal, making it the largest single shareholder. Billiton produces energy coal for the South African domestic and export markets. It has four primary coal-mining operations, Khutala Colliery, Klipspruit Colliery, Middelburg Colliery and Wolvekrans Colliery, as well as four processing plants. Its operations are located near the towns  of Malahleni and Middelburg in the coalfields of Mpumalanga Province.

Xstrata is the world’s largest producer and exporter of thermal coals and like Billiton, has a global footprint. The company is in the process of a $2-billion development of four projects that includes the Goedgevonden expansion and optimization of Tweefontein and Actom East.

Coal Plays a Big Role in RSA
Coal is now South Africa’s third-largest export earner, close behind platinum and gold. Even so, the country is a major consumer of its own product. Coal-fired power stations deliver around 94% of South Africa’s electricity. This makes it one of the most coal-dependent countries in the world, and also one of the heaviest emitters.

In recent years, Eskom’s ability to generate power has fallen behind demand. The country’s margin is now razor-thin, at 1%, against an international benchmark of 15%. Rolling blackouts that hit the country between 2006-2008 were at least partly blamed on inadequate coal stockpiles. In early March 2008, stockpiles at Eskom’s 12 coal-fired plants dropped as low as a 5.4-day supply. But most problematic has been a lack of generation investment as the government dithered over whether to break up the utility and sell it off, or keep it as a state-owned monopoly.

Pressure from unions, statist-oriented government officials and, not least from Eskom itself, saw the monopoly model prevail. Eskom is now going full bore to upgrade aging infrastructure and build new power plants and although it has included renewables, hydro and nuclear in its long term plans, coal is still center stage.

South Africa’s coal producers face the same electricity constraints that are putting the squeeze on mines nationwide, and indeed, the entire country itself. They also have the additional pressure of having to keep Eskom supplied, fending off sporadic attacks from government officials accusing them of favoring international buyers over local interests.

At this point Eskom’s margin of spare capacity is hovering around 1%, dangerously below the international benchmark of 15%. Power cuts seem all but certain in the coming Southern Hemisphere winter months, when demand traditionally goes up. Billiton has the additional problem of being the bad guy of the moment; its secret deal signed in 1992 with Eskom gives it access to electricity for its two aluminum smelters at a generously preferential rate.

Given the sorry position in which Eskom finds itself, it’s not surprising that the private sector is eager to step in. However, legislation allowing independent power providers has yet to be introduced, much to the frustration of the country’s business community.

“We’ve spoken to coal mines in the Waterberg—we are in the queue,” said Kishore Kumar, CEO of Vedanta Zinc International, while on a recent visit to South Africa. Vedanta has several zinc smelters in the country but Kumar warned they could soon become unviable because of rising electricity costs, as well as uncertain supply. Vedanta operates power stations of its own in India, and is eager to do the same in South Africa, sourcing coal from within the country to supply them.

“We see it as beneficiation. If we can produce electricity from coal here in South Africa, we are contributing directly to the local economy. There’s no need to simply export coal when the value can be realized right here. But we need government clarity on this before we can do anything,” said Kumar.

For coal producers, Eskom’s state-protected dominance presents a two-fold problem. Production is curtailed because Eskom does not yet have enough plant capacity to meet the country’s electricity needs. At the same time, Eskom is pressuring them to curb prices.

Coal is the largest single cost item in Eskom’s books—making up R328-billion ($36 billion) of its five-year projection from 2013 to 2018. Its CEO, Brian Danes, met with the four largest coal producers earlier this year and called for a “pact”—in effect a voluntary price limit. Eskom also wants coal to be declared a strategic resource. If this happened, the government would have the authority to limit exports and force local producers to favor Eskom over foreign clients.

“Eskom uses about 60% of South Africa’s production. It wants to have more coal-fired energy, but the government and the energy regulator Nersa (National Energy Regulator South Africa) wants more nuclear and renewables,” Prevost said. “Coal provides around 93% of South Africa’s energy and the government wants to reduce this substantially.”

Ultimately, though, it may not have a choice. “To keep up with demand Eskom needs two or three more Medupi’s. There is enough coal in the ground for up to 10 more stations,” Prevost said.

Development & Infrastrucure
The key to South Africa’s coalfields, therefore, is its own energy needs, rather than foreign demand. So crucial is power supply that it is now driving the development of potentially rich, yet geographically isolated coal deposits in the country’s northern hinterland.

The first of these is the Waterberg coalfield in the Ellisras Basin in the Limpopo province. It holds an estimated 50 billion mt, of which about a quarter could be extracted using opencast mining. Up to now, however, it has been the source of limited activity.

“The Waterberg Coalfield has great potential for coal mine development,” said Neil McKenna, director at Venmyn Deloitte in Johannesburg. “At the moment there’s only one mine, Grootgeluk, which serves the Matimba power station and will also contribute to the Medupi power station under construction. The reality is they could build two or three more similar-sized stations. The amount of coal there is quite extraordinary.”

The biggest hindrance to development is the region’s relative isolation. It has few railway connections and is a long way from Richards Bay. The quality of coal is also lower than that found in the Highveld.

“It is low quality, but can be upgraded through washing,” said McKenna. “It has massive potential to supply local power station feedstock and for export thermal and metallurgical coal. The problem is the lack of infrastructure. In spite of the fact that it is called ‘Waterberg,’ there’s a lack of water in the region, being located in one of the drier parts of the country.”

According to McKenna, another region that could benefit from an unshackled energy policy is the Soutpansberg coal basin, along the northern border with Botswana. “The Soutpansberg is another area with significant potential. It has very high quality coking coal but is historically an area that has been ignored because of its inaccessibility and lack of infrastructure.” Even if policy were to be implemented tomorrow, however, it would still be a lengthy process before the region became a significant coal producer. “Even if infrastructure is improved, development is still five to 10 years away. Large mining projects have a long lead time,” he said.

The formidable challenges have inevitably constrained the ability of mines to raise capital. “A lot of our work is concentrated on the juniors,” McKenna said. “Eskom has made a commitment to source more coal from smaller producers. The problem is raising capital for these operators in the current market and environment. South Africa particularly is not proving a very attractive destination right now.” Should the right policies be put into place, however, this could change fairly rapidly. “If independent power producers were cleared to go ahead, a lot of projects, particularly smaller players, could take off.”

If there is a bright spot on this gloomy horizon, it’s that Transnet, the state-owned logistics company, appears to be moving forward on several infrastructure projects that will have a profound impact on the country’s ability to export coal.

Last year, Transnet announced a $32-billion investment program, the Market Demand Strategy, to revamp and expand its ports, rail and pipeline infrastructure and equipment. About two-thirds of the required funding will be raised from internal resources, while the remainder will be raised through various sources in the debt capital markets.

Although industry tends to view plans from state entities with a jaundiced eye, it does appear that this one may be gaining momentum. In March, the China Development Bank said it would loan Transnet about $5 billion, almost half its borrowing requirements. It’s possible that further such announcements will follow.

China has lagged India in purchases of South African coal, but is eager to catch up. In 2011, South Africa’s shipments to China, the world’s largest coal consumer, rose 88% to 12.26 million mt in the first 11 months of 2011, according to Bloomberg. But like the rest of the country’s customer base, it has to temper its demand with lack of rail and port infrastructure. Chinese firms take around 2 million mt a month of South African thermal and coking coal, or up to a third of South Africa’s total coal exports from the Richards Bay Coal Terminal.

China has a strong incentive to prod the dozing beast that is Transnet into putting its plans into practice. Last year, China agreed to sell 96 much-needed locomotives to Transnet for $400 million. And, recently Chinese shipping firm Chery said it was in negotiations with Transnet to build a ship repair facility at Richards Bay.

Growing Export Capacity
Currently, Richards Bay Coal Terminal has a nameplate capacity of 91 million mtpy. However it ships substantially less than that. In 2012, it managed 68 million mt. Exporters have blamed the low output on Transnet’s lack of rail capacity; however, Transnet counters that the major shareholders in Richards Bay have used their monopoly to keep out small producers, preventing them from using the facility.

Because of this, Transnet has begun working on building a new, rival coal terminal adjacent to the existing facility in Richards Bay harbor. The new port will have the capacity to export 14 million mt a year, and stockpile up to eight grades of coal.

Also in the works is a new 146-km line to be built between Lothair, in South Africa, and Sidvokodvo, in Swaziland, which will reroute much of the general cargo traffic that now clogs up the coal line. The new link will divert general freight currently being moved on the Ermelo-Richards Bay line through Swaziland, thereby increasing the capacity of South Africa’s constrained coal channel from Mpumalanga to the Richards Bay Coal Terminal to what Transnet CEO Brian Molefe said would be “close to 100 million mt.” Currently, the coal line has the capacity to move about 72 million mt—well below the 91-million-mt nameplate capacity of Richards Bay. The line is expected to be commissioned in 2016.  

This diversion will also allow for an increase of traffic from the Waterberg. Transnet’s own calculations show the region will require capacity of between 80 million mt and 135 million mt for both local and export markets over the long term.

Finally, Transnet is also looking at short-haul feeder lines that will supply local power stations. At the moment trucks haul much of the country’s coal—much to the annoyance of commuters.

Should these plans be implemented, they would unlock substantial value now trapped in the earth of central and northern South Africa.

“Given that South Africa has massive, and I mean truly massive, coal reserves, the majority of the country’s power will come from coal in the foreseeable future,” said McKenna.