South Africa's Coal Demand and Supply Trends - A Snapshot
Date Published: 6 Sep 2011
Written by Frost & Sullivan Mining Industry Analyst, Wonder Nyanjowa
South Africa's energy intensive economy is overwhelmingly dependent on coal. This fossil fuel provides about 80% of the country's primary energy needs, supports 90% of the electricity generation and provides feedstock for the country's synthetic fuels manufacturing plants. Coal is also used directly as a fuel in the steel, cement and brick manufacturing industries, writes Wonder Nyanjowa, Mining Industry Analyst at Frost & Sullivan, an international growth consulting and partnership company. South Africa's coal reserves are large and provide an inexpensive source of energy. The limited availability of alternative energy sources, and the apparent indecision regarding nuclear energy, point towards coal's continued domination of the country's energy mix going forward
The widespread power shortages that South Africa has been experiencing, since 2008, highlight the risks that are inherent in this heavy dependence on coal. South Africa does not only need to upgrade power generation and transmission infrastructure, but also ensure adequate supplies of coal to the power generating plants. The country's coal reserves are finite and they will run out at some point in future. The anticipated decline in South Africa's coal production will bring to an end the era of cheap electricity that the country has enjoyed for decades. The dilemma that the South African government has been facing, in recent years, is determining how long the existing coal reserves will be able to sustain current and future coal consumption.
The increasing world concerns on climate change, and environmental sustainability, have put coal mining and consumption under the spotlight. Frost & Sullivan believes that Coal mining, transportation and consumption also pose significant risks to the environment. Coal fired power generating plants are estimated to be the source of approximately 70% carbon dioxide, sulphur and other particulate emissions into the air globally. The country's continued reliance on coal as the major source of energy is not environmentally sustainable. The government has made policy decisions to diversify the country's energy mix by developing renewable energy sources. Environmentalists have been calling on South Africa to place a moratorium on the construction and development of new coal fired power plants. South Africa is a signatory to the Kyoto Protocol, as an Annexure 1 country, and it is obliged to reduce its greenhouse gas emissions in the future. The country's carbon intensity is likely to undermine the international competitiveness of its exports, such as beneficiated minerals and manufactured goods.
Coal production and consumption in South Africa has remained fairly unbalanced, with rising coal demand on one hand and constrained supply sources on the other. Eskom is currently expanding its power generation capacity by building two new power plants, and returning into service three coal fired power plants that had been mothballed. The power utility's coal consumption is likely to increase by an additional 50 million tonnes by 2017. The expansion of Sasol's synthetic fuels manufacturing capacity would also see its coal consumption increasing by an additional 25 million tonnes per annum. The South African government has, however, decided to expand the country's synthetic fuels manufacturing capacity in order to reduce its oil import bill and its exposure to oil price shocks.
Frost & Sullivan predicts that the domestic demand for coal is set to increase by an additional 75 million tonnes per annum by 2017. South Africa's coal is in huge demand in China, India and the European Union, due to its low ash and sulphur content. Lower quality coal, that has been traditionally suitable for Eskom's power generating purposes only, is now being bought by merchants from India. Industry sources expect the growing domestic coal consumption to be in conflict with exports in the future. Eskom has responded to this challenge by locking most of the major coal mining companies into long term supply contracts. The South African government has previously hinted at the possibility of placing a moratorium on coal exports and ensuring security of coal supply to Eskom. Most European Union governments, and the United States, are likely to lift their moratorium on coal fired power plants, in response to the nuclear safety concerns triggered by the Fukushima nuclear plant disaster in Japan. Export demand for South Africa's coal is forecasted to remain strong in the near to medium term.
The existing coal production capacity in South Africa cannot sustain the forecasted growth in coal demand. Since 2003, South Africa's coal production has remained stagnant at levels around 250 million tonnes a year, only posting small incremental changes at best. Depleted coal mines in the Witbank, Ermelo and High Veld coalfields in the Mpumalanga province, difficult geological conditions, declining coal recovery grades, high operating costs, and infrastructural constraints at Transnet are some of the factors for the stagnation in coal production and exports. Industry sources indicate that most of the existing coal mines in the Mpumalanga province will be exhausted by 2020, whilst the two collieries in KwaZulu Natal have already closed.
The surging coal demand, in the face of supply side constraints, has manifested itself in rising coal prices. Free on Board (FOB) coal prices reached an all time high of approximately $120 per tonne at Richards Bay Coal Terminal (RBCT) in recent years. Large scale coal mining companies have secured more export orders, so as to maximise their exposure to rising coal prices. Eskom has also reported an average of 25% increase in its primary energy costs per annum in the past 3 years. Electricity prices have also risen sharply in recent years, as the power utility battles to contain the rising primary energy costs.
Frost & Sullivan expects coal mining activities to gradually shift from Mpumalanga province to the Limpopo Province. The Waterberg coalfield in the Limpopo Province hosts about 50% of the country's coal reserves and it has one colliery operated by Exxaro. The Waterberg coal field represents the future of coal mining and electricity generation activities in South Africa. Other coal miners such as Anglo Coal, BHP Billiton Energy Coal (SA) and Sasol Mining are still prospecting in the area. Eskom is building the Medupi power station, in addition to the Matimba power station, that is located in the Waterberg coalfield. Sasol's Project Mafutha, that includes a coal mine, chemical plant and power plant, is one of the large scale development project that is planned in the Waterberg coal field.
A number of infrastructure issues need to be addressed for the Waterberg coal field to become the hub of coal mining and power generation activities. The Waterberg coal field is 500 kilometres away from South Africa's economic heartland and is the infrastructure grid that is central to coal marketing and distribution. The road and rail networks, linking the Waterberg coal field and Gauteng, are not sufficiently developed to handle large scale coal mining and transportation activities to power plants and coal export terminals in KwaZulu Natal. The Grootegeluk mine in the Waterberg coal field is supplying approximately 2 million tonnes of coal to domestic and export markets.
Low coal grades, difficult geological conditions, water shortages, mine depths and environmental concerns are some of the issues that are likely to impede the development of new coal mines in the Waterberg coal field.
Frost & Sullivan forecasts coal supply to remain flat in the short to medium term, owing to long lead periods between exploration, development and commissioning of new mines. An investment of approximately R90 billion will be required to develop 40 new mines, in order to meet the anticipated increase in both domestic and export demand for South Africa's coal.
Contact:
Samantha James Corporate Communications - Africa P: +27 21 680 3566 F: +27 21 680 3296 E: [email protected]
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