Looks like Old Park Lane have been reading these posts re possibility of increase in Domestic margins OR some export of domestic quality stuff if logistics become available;-)
This is a result of the complex interaction between global freight differentials and growing emergence of Indian power stations utilising lower rank coal. The recent fall in freight rates has created opportunities for coal with a variety of origins and quality to be competitive in the Indian market which is turning to lower rank coals to fuel the countrys rapid growth in power demand. India may face a coal shortfall of 190 Mtpa by 2015 requiring a 250% increase in imports to bridge the gap with new domestic production which suffers from very long development lead times, according to a recent KPMG report.
According to RBCT, the percentage of coal being exported to India from the Richards Bay has increased to 30% in 2010, from 5% in 2008. The implication is that coal that would have previously been supplied to Eskom is now being shipped to India because producers can secure higher prices. This results in very poor quality coal being sold to Eskom. Although Eskoms power stations have been built to run on lower quality coal, the quality of coal received recently by the utility is so poor that it is struggling to meet the countrys electricity requirements. The chief executive of Eskom recently stated that utility was losing between 500 and 1000 MW a day of generation capacity because of the exceptionally low quality of the coal.
ESKOM NOW FINDS ITSELF COMPETING WITH COUNTRIES LIKE INDIA for the lower quality coal produced in South Africa. According to the latest Eskom annual report, there has been a marked deterioration in the quality of the coal to Eskom since 2006.
This balance between domestic demand from Eskom in South Africa, rising export prices and export demand for lower quality coals in Asia is likely to result in one of, or a combination of the following:
Increased domestic prices. Given its major expansion programme, Eskom may be forced into increasing contract prices in order to secure suitable quantities and quality of coal for its power stations. Whilst we would not expect an increase to anywhere near export parity, we believe increases from the current ZAR 170 ($25/t) are possible which would provide a significant uplift to our NPV and valuation of Continental Coal.
Government regulation of coal exports. The South African government is considering the regulation of coal exports to protect Eskom from local producers acquiring higher prices in India and China. The government is said to be considering amendments to the Mineral and Petroleum Resources Act but not go as far as declaring coal a strategic resource. Our view is that sweeping changes to regulation are unlikely.
On balance we believe that even with tighter government regulation of exports, the likelihood is that domestic coal prices will have to rise in order for Eskom to secure enough supply of quality coal for its build-out programme.
Thanks To Old Park Lane
www.oldplc.com
CCC Price at posting:
85.0¢ Sentiment: Buy Disclosure: Held
