trader - see below for what has happened in the last month. hard to know the final impact on the likes of CCC, but clearly there is risk and CCC probably being more impacted than others due its its mines being undeveloped and also funding requirements - much harder to get funding when such discussions are going on.
State hints at coal export limits, price controls
7 February 2011
Source URL:
http://www.businesslive.co.za/incoming/2011/02/04/state-hints-at-coal-ex...
Johannesburg: Is South Africa headed towards a more heavy-handed regulated coal mining industry? It would certainly appear so (writes Ray Faure). According to Business Day, Mineral Resources Minister Susan Shabangu on Wednesday issued a thinly veiled threat of state-imposed regulations to ensure the domestic coal supply for electricity if the mining industry was not able to do so. State-owned power utility Eskom itself has also been punting price controls and regulation of the coal mining industry to secure the cheap and abundant supplies of coal needed for its current and future fleet of coal-fired power stations.
Says energy analyst and managing director of EE Publisher Chris Yelland, when pressed for details, Eskom officials become a little coy. "But stripping aside the euphemisms, what Eskom is saying is that, in the light of higher global demand and world market prices for even the low-grade coal used in Eskom power stations, the utility is having difficulty matching thse prices and contrating on a voluntary basis with the coal mines to secure its medium and long-term supplies.
"Eskom is therefore seeking heavy-handed new mechanisms to ensure its own coal needs are met, and is suggesting policy options such as price controls, licensing, export quotas and restrictions on the export of the grade of coal used by Eskom, and increased powers for the minister to intervene in the interests of domestic energy security.
"In short, instead of pricing based on market supply and demand, and voluntary long-term contract prices negotiated between the utility and coal miners, Eskom is pushing for government regulated pricing that provides a 'fair return for the capital and skills that they [the coal miners] contribute, linked to the cost of capital and the risk that they assume' - a kind of 'cost plus' methodology," avers Yelland.
Growing coal exports grave concern to government
Minister Shabangu told delegates at the recent McCloskey Coal Exports conference in Cape Town that growing exports of South African coal - particularly lower-quality material - were of grave concern to the government and a threat to its aspirations for economic growth. She added that the government was pressed to secure the national interest of ensuring there is enough coal for Eskom to burn and power much-needed economic growth.
Eskom's Chief Commercial Officer Dan Marokane told the coal conference that the power utility is proposing that South Africa's coal resources are developed and exploited in the national interest. A key element would be a national primary energy coal development plan that would provide a framework for investment in the industry.
Eskom calls for mechanisms to ensure domestic demand met
Eskom also proposes that mechanisms should be put in place to ensure domestic energy needs are met, at prices based on efficient costs with fair returns for coal producers.
Marokane said the parastatal had made significant progressimplementing the coal supply strategy it has put in place over the past three years and it is looking at options to ensure security of supply for its power stations over the long term.Current coal stockpiles were at an average of more than 40 days and approximately 95% of Eskom's requirements to 2018 had been contracted or committed. Rail volumes had been increased and quality management practices and contractual provisions had been improved.
However, Eskom faced substantial challenges to secure the long term coal supplies it required for its existing and new power stations.
"We have choices to make as a country if we are to find the optimal balance between coal exports and domestic energy security," Marokane said. "We are concerned that the market on its own may not ensure that balance."
Eskom had a plan that sources most of the coal it required for its existing power stations from Mpumalanga. However, Mpumalanga did not have sufficient coal to supply Eskom under a 60-year life of station scenario and risks to coal supply had increased because of delays in developing major new long term sources. In addition, strong demand for coal exports, including for those grades of coal which in the past were used only by Eskom, had put upward pressure on domestic coal prices.
"Our concern is that these risks will raise the cost of coal and so lead to increases in the cost of electricity that would have a negative impact on South Africa's economy come," Marokane said. "We want the export coal industry to thrive, but we must at the same time ensure that South Africa has the coal it needs to ensure that we can keep the lights on in the long term, at a cost that the country can afford," Marokane said.
Meanwhile, the Chamber of Mines has defended the quality of coal supplied by the industry to Eskom. In a statement today, Bheki Sibiya, Chief Executive of the Chamber of Mines, said:
"Recently several newspapers carried articles reporting Eskom as blaming the coal mining industry for supplying poor quality coal for electricity generation and consequently impacting on Eskom's electricity supply capacity. There is also an accusation that the coal mining industry is diverting poorer quality coals, traditionally provided to Eskom, off to the so called lucrative export markets.
"These accusations and insinuations have prompted Eskom to seek the introduction of heavy handed mechanisms, such as price controls, quotas on exports and restrictions on the exports of the types of coal used by Eskom. There have also been calls from some quarters for the Department of Mineral Resources to declare coal as 'strategic mineral' which would allow the DMR Minister to apply certain conditions on the production, storage and use of coal in South Africa.
"However, the Chamber is greatly relieved that the Minister of Mineral Resources, the Honourable Susan Shabangu has resisted the calls to declare coal a strategic mineral. The Chamber accepts the Minister's call for the industry to work closely with government to ensure a growing coal mining industry that provides sufficient coal for domestic electricity generation and which grows its competitiveness in the global export markets," Sibiya noted.
He added that the Chamber was compelled to clear the air on real issues behind these accusations and that it was now important to get the facts on the table.
In relation to coal quality issues, he said, during the 2009/2010 year Eskom, burnt 122.7 million tons of coal at an average calorific value of 19.22 mega joules per kilogram (MJ/kg) and an average ash content of 29.56% (source: Eskom annual report).
"The average quality of coal received by Eskom does not appear to have changed significantly over the last decade. It also in general complies with the average parameters set out in the supply specifications in the contracts between the coal mining companies and Eskom," Sibiya pointed out.
"However, the Chamber is aware of only two power stations that have been affected by coal quality issues and that all other Chamber member tied collieries to Eskom were supplying coal to Eskom at the prescribed qualities in the contractual agreements between the Eskom and the individual companies. In relation to the affected two power stations, agreements between the respective mining companies and Eskom have recently been reached to resolve the quality issues. The entire coal mining industry cannot be painted as providing poor quality coal to Eskom if this has just been a problem in two power stations," Sibiya asserted.
Where Eskom experiences difficulty with specific coal suppliers it should address the issue with those suppliers as it is a commercial contractual issue and not an industry policy matter, he added.
Sibiya also denied as "a fallacy" accusations that the coal mining industry was diverting Eskom quality coals for exports, especially to India.
In terms of coal supply going forward, he said the Chamber was not aware of any short term coal supply problems to Eskom for the existing power station fleet.
"Eskom has already contracted the coal supplies for the two large power stations under construction, namely Medupi and Kusile and the coal mining companies are already investing billions of rand in expansions and new projects at Grootegeluk and New Largo for coal supply to Eskom."
Sibiya added that heavy handed mechanisms to try and regulate the domestic coal mining industry and interference in a voluntary market based system might well lead to significant distortions and unintended consequences for the country and might well prejudice security of primary energy supply.
"There is no coal supply or quality crisis. Rather there is an industry that is willing to work with the relevant government, labour and industry stakeholders to facilitate continued security of primary energy supply and the continued growth of South Africa's world-class coal mining industry," he concluded.
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