by gavin du venage, african editor
South Africa’s struggling coal industry may soon get relief with the government eager to support new investment, according to research firm IHS Markit. Speaking on a conference call, IHS Markit researcher Randy Fabi and Senior Director David Price presented the results of a fact-finding mission to the country. Coal, like the rest of South Africa’s mining sector, has struggled to reach its potential over the past few years, but it now appears the industry is moving once again in the right direction.
The country’s President Cyril Ramaphosa and his Minister of Mining Gwede Mantashe are committed to bringing in changes that will aid the local industry. “President Ramaphosa has a lot on his plate,” Fabi said. “The coal sector is a major employer and provider of electricity.”
Currently South Africa is the sixth largest exporter of coal, with most leaving the country via the Richards Bay Coal Terminal on the east coast. Offshore sales amount to around US$5 billion, a vital source of foreign exchange.
Coal also underpins the country’s electricity grid, supplying around 90% of its energy needs. Although there was a global shift away from coal, the cabinet committed to keeping it as part of the country’s energy mix. Earlier this year, Mantashe was also given the energy portfolio, signaling the relationship between the two sectors. “Mantashe many agree is the biggest cheerleader for coal in the cabinet,” Fabi said.
As a result, mining firms are eager to press their needs and concerns on a more sympathetic ear than they have enjoyed in more than a decade. Critical to the government’s support of the sector will be in how it approaches the troubles of electricity utility Eskom, which is weighed under a colossal debt of more than $30 billion.
To this end, Ramaphosa has pledged $16 billion in relief funding, and Eskom in its turn will sponsor the development of new coal projects. Power outages or “load shedding” are also being addressed, Fabi said. “The problem that caused load shedding last year — a lack of coal — now appears fixed after Eskom signed dozens of new contracts,” he added. Around $800 million has been made available for “cost-plus” mines to be constructed.
“Cost-plus” was a long-time strategy whereby Eskom would provide the capital to develop a mine in return for a guaranteed coal supply based on a price that paid operating costs plus a small margin. This approach was abandoned under the previous administration of Jacob Zuma, which pushed Eskom contracts into the hands of politically connected cronies. Now, “cost-plus” is once again being rolled out as a way to increase coal supply.
Although supply is being restored, Eskom is now struggling with coal quality. “Eskom has no way of checking the quality of coal at the mine gate,” said Fabi. This resulted in outages caused by mechanical failure in power plants. Eskom is working on this and has set aside $70 million specifically to develop quality control.
Quality, meanwhile, is providing another unexpected challenge to Eskom, in that low-quality coal is now in demand on the export market, said Price. “India has taken a liking for South Africa’s 4,800 kilocalorie (kcal) material, putting it into direct competition with Eskom,” Price added.
India is South Africa’s largest coal buyer, and many of the country’s power stations are similar in design. “Eskom should be looking to sign contracts as far forward as possible,” Price said.
Globally demand for higher grades of coal is low, mostly sought after by Japan, which uses high-tech modern boilers. Europe, once a buyer of higher grades, has now largely transitioned away from coal, and demand has “collapsed” noted Price.
Consequently, Price expected South African exports through Richards Bay to remain relatively flat at 85 million tons per year, as lower grade coal was kept at home to support Eskom.