By Mathabo Le Roux 18 Feb 2008 at 07:49 AM GMT-05:00
JOHANNESBURG (Business Day) -- Eskom’s plan to buy an additional 45 million tonnes of coal to replenish depleted stockpiles has been met with incredulity internationally, with analysts saying it overlooks severe global coal supply constraints, logistical challenges and price concerns.
This could be the first time that South Africa, a net exporter of coal, imports coal. A New York-based analyst, who declined to be named, said on Friday Eskom's plan could be hampered severely by tight global supply caused by Indian and Chinese demand.
"The markets here have been abuzz with the news (of Eskom's coal procurement plan)," the analyst said. There was concern that Eskom had not taken into account extraneous factors that could affect its plans.
Coal supplies have been constrained severely by disruption in Queensland, Australia, one of the world's top coal-producing regions, where torrential rains and flash floods led to six big coal producers, including Rio Tinto [NYSE:RTP; LSE:RIO], BHP Billiton [NYSE:BHP; LSE:BLT] and Xstrata [LSE:XTA], declaring force majeure, saying they could miss coal deliveries.
Eskom said last week it would buy the 45 million tonnes of coal over and above its running requirements of 125 million tonnes a year.
The additional coal would be added over the next two years to raise coal reserves at power stations to at least 20 days' supply.
Brian Dames, new head of Eskom's primary energy, generation and enterprise cluster, conceded that the procurement would have a significant effect on operating costs, giving rise to higher electricity prices.
"If one becomes a significant importer of coal one needs to be acutely aware of problems one will encounter to get the coal there," the analyst said.
The cost implications for Eskom might also have been underestimated.
The analyst said South African collieries could probably supply only half of the 45 million tonnes of coal Eskom planned to buy. The rest would have to be imported.
Dames estimated last week that the coal would cost Eskom R150-R250/tonne ($20-$33/tonne), as opposed to the average of R90/tonne ($12/tonne) it pays under long-term contracts.
The spot price of coal reached $100 a tonne (R750) on Friday, and has been moving upwards steadily over the past month.
Chamber of Mines economist Frans Barker said yesterday that price was "certainly one of the issues we are looking at, and Eskom has indicated that there would have to be interactions with the national energy regulator".
"All of these factors are in the pot in the discussions with Eskom," Barker said.
On the coal price, figures of R400/tonne ($53/tonne) had been mentioned, he said. At R400-R750/tonne, Eskom's additional coal purchases could cost the utility anything between R25 billion ($3.28 billion) and R33.7 billion ($4.42 billion).
Barker said there had been many interactions between local coal suppliers and Eskom. Many collieries had indicated that they were willing to help the utility.
"This is not something that will happen immediately, but over time," Barker said. Significant volumes would be processed to ensure improved stockpiles at power stations before winter.
Apart from supply constraints, Eskom also faces formidable challenges getting the coal to SA, with the Richards Bay coal terminal notoriously congested, while road and rail transport to the utility's power stations in Mpumalanga would also present a big headache.
Eskom put out requests on Friday for proposals for co-generation projects as part of its plan to bolster faltering electricity supplies.
Eskom spokesman Andrew Etzinger said that "co-generation" was when industrialists sold waste by-products that could be used to generate electricity.
Wood shavings and chips from a paper mill could be burnt to generate electricity.
The gas seen burning as orange flares coming out of chimneys at steel mills and petrochemical companies could also be used.
Last year the company issued requests for interest, hoping to secure 900 MW of electricity this way, and indications were that it could receive 5,000 MW.
That "was an encouraging response", said Etzinger.
"For every megawatt generated by such a scheme, it is one more megawatt on our national system, which will help tremendously."
With Sapa. Listen to RI’s recent Podcast with Kevin Bambrough of Sprott Resource Corp. about the rallying coal market.
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