Is coal-reliant South Africa playing vacuously with its...

Is coal-reliant South Africa playing vacuously with its must-have mineral?

By: Martin Creamer

10th February 2012

South Africa is more reliant on coal than any other country in the world, XMP Consulting analyst Xavier Prevost showed with an elaborate table of statistics flashed onto the screen at last week’s IHS McCloskey South African Coal Exports Conference, in Cape Town.

But South Africa does not have an explicit coal policy despite its crucial dependence on the mineral, University of Cape Town Graduate School of Business’s Professor Anton Eberhard pointed out to the same audience.

South Africa’s coal roadmap initiative had “yet to bear fruit”, South African Coal Road Map chairperson Ian Hall told the McCloskey crowd, adding lamentably that the first phase of South Africa’s coal roadmap, which was scheduled to be released in November, had still not been completed.

Contrast this with neighbouring Botswana’s coal roadmap initiative, which started after South Africa’s. ASX-listed Hodges Resources MD Mark Major, whose company is developaing coal resources in Botswana, reported favourably on Botswana’s good coal roadmap progress, commenting in addition that the country was “such a great place to do business in – it’s one of the best business places that I’ve been to in the world”.

Landlocked Botswana, which has allowed itself to be far too diamond-dependent and which does require urgent diversification, still has a long way to go to see to rail infrastructure to distant coal-export ports.

This contrasts with the comment of Transnet GM Divyesh Kalan, who reported that South Africa’s State-owned coal line capacity to the Richards Bay port was suddenly ahead of coal availability and no longer behind it, as was the case in the past.

Kalan’s comment on the lack of coal availability in South Africa contrasted sharply with the comment of IHS Cera senior director: global steam coal advisory David Price, who told the conference that there was unremitting gloom throughout the export coal supply sector, which was “horribly oversupplied”.

No sooner had Mining Weekly reported Price’s oversupply comments and his reports that Europe was awash with thermal coal, India was suffering a 2011 coal surplus hangover and China had ceased ordering coal in the first quarter of 2012, than JSE-listed Wescoal CEO Andre Boje hotfooted it across to Mining Weekly’s conference work station to report the complete opposite situation in South Africa, where he said there was very little inland coal to be had in South Africa.

That highlighted the peculiar position of South Africa within the global thermal coal arena as a country where supply uncertainty persists, despite a global glut, and where power utility Eskom shows regular concern about security of long-term supply.

National Power Commision

Eberhard, who is a member of South Africa’s new National Planning Commission (NPC), not only drew the packed conference’s attention to the absence of an explicit South African coal policy, but also highlighted the country’s lack of coal export strategy, despite Prevost confirming that coal is South Africa’s number one foreign exchange earner.

Moreover, even though coal accounts for 95% of South Africa’s energy production and 40% of its petrol and diesel, not to speak of 90% of the carbon reductants for the metallurgical industry and 200 major chemicals, there is an absence of accurate and up-to-date coal reserve statistics.

The professor expressed the hope that the upcoming Council of Geoscience (CGS) report on reserves would provide more certainty and clarify the situation.

But, like the coal roadmap, the CGS has been missing its expected completion dates, to which Mineral Resources Minister Susan Shabangu drew attention in her speech to the conference.

The Minister told the gathering that it had been hoped that the CGS report on South Africa’s coal resources and reserves would have been available in time for last year’s United Nations climate change convention’s seventeenth Conference of the Parties in Durban, but that did not happen. Instead, the CGS report is still not out, but is being finalised for release in the first half of this year.

It is hoped that the CGS report will provide a basis for the future of the industry and help inform the South African government’s long-range planning to ensure security of local coal supply.

“Also, the study could provide opportunities for the growth and expansion of the industry,” the Minister said, which is an encouraging sentiment.

Other Eberhard concerns were the absence of a statement on whether or not South Africa would build more coal-fired power stations after Medupi and Kusile, which are currently being built by Eskom. He also flagged the absence of clarity on the building of another Sasol-type synfuels plant.

On the export front, South Africa had suffered a major opportunity loss by failing to even match the coal export levels of 1999, in sharp contrast to countries like Indonesia and Australia, which show up South Africa’s performance as being comparatively “pathetic”.

A sustainable balance between the use of coal domestically and the export of coal has still to be struck and Eskom has been unable to sign long-term contacts for all its future coal needs, with some of its power stations competing for the kind of low-grade coal that is now grist to India’s mill.

On the other hand, South Africa’s policy around climate change had been strident, even though its targets have little chance of being achieved.

The targets that have little chance of being hit have simultaneously dealt a needless blow to coal and put question marks into the minds of coal investors.

As a result, the NPC has sought to lay out some preliminary objectives and perspectives on how it sees the future of coal until key policy and investment issues are tackled.

The National Development Plan is exploring the future of South Africa’s mining and minerals beneficiation sector.

The mining sector generates important indirect benefits in other industries and makes a major contribution to the balance of payments.

Eberhard said that while it made no sense for South Africa to discard its mineral riches, the country also needed to become competi-tive in a low-carbon future, which meant there would be winners and losers among the country’s sectors, including the mining sector.

The country also needed to be mindful of the costs that were involved and the importance of maintaining a reliable power supply to grow economically, he added.

The NPC had placed much emphasis on infrastructure provision, which it saw as being vital in the unlocking of economic growth.

Investment spending would need to begin approaching 30% of gross domestic product by 2030, up from 16% in the early 2000s.

The plan urged faster and deeper reforms in the governance of State-owned enterprises and bringing in competition in participation with the private sector.

Given the fixed investment and the low direct costs, coal would continue to be the dominant fuel for the next 20 years.

Domestic coal consumption would be influenced primarily by climate change issues and Eskom’s demand would peak in the early 2020s, but what was uncertain was the extent to which that would plateau off and the extent of building further power stations as some of the older ones are retired.

The National Development Plan’s strongest point was the need for a national coal policy to be based on a realistic assessment of the country’s reserves and the sustainable expansion of South Africa’s coal export markets.

All that needed to be achieved within a strategic negotiated trajectory of carbon intensity, balanced against the need for economic and employment growth.

“There is no reason why our coal exports should not be 50% higher,” he said.
Eberhard said that it was going to be difficult to meet the climate-change pledges, even if there were increased use of renewable forms of energy like wind and solar power.

The fragmentation of the coal industry had resulted in too few coal companies having the financial muscle to sign take-or-pay contracts with Transnet.

Specific planning of specific coal reserves needed to be put in place to create a balance between domestic coal consumption and the level of coal exports in order to forestall government’s resorting to a permit system for coal exports.

Eberhard said that it was hoped that the final plan of the 25-member NPC would be adopted in May for submission to the Cabinet.

Failure to give coal the recognition that the hard reality of South African life demands will imperil the future of a country.

Prevost reported that coal mining provided more than 73 000 jobs, a figure that was poised to increase as smaller mines were opened in the future, and coal-mining jobs fuelled other jobs.

While South Africa’s carbon emissions that result from the burning of coal are relatively moderate, compared with the large industrialised countries like the US and China, Shabangu pointed out at the IHS McCloskey conference that important COP 17 resolutions had been adopted, which pointed to the need for coal to be repositioned.

“In this regard, the industry needs to raise the level of investment in clean coal technology research programmes. This is likely to present the country with opportunities to continue exploiting this vast resource without the risk of further raising the carbon intensity of its economy,” Shabangu said.

To rejig an expression former Liverpool manager Bill Shankly made famous, coal’s pre-eminent position in South Africa is not a question of life and death, it is far more important than that.

Edited by: Martin Zhuwakinyu