Sasol and Engen’s proposed merger received an unprecedented amount of attention last year from the competition authorities and was eventually rejected, despite initial recommendations that it go ahead.
Government has been trying to ensure prices are competitive by increasing pressure, particularly on dominant suppliers, as a way of facilitating the development of the manufacturing and small and medium business sectors.
Local coal prices have reached export parity levels and in some cases are above the international price for coal, according to evidence presented to the competition authorities. Prices have increased by about 50% in 12 months and further sharp increases are scheduled for this month, says a report by the Competition Commission.
Thermal coal prices for small consumers increased from R112 a ton in January 2005 to R177 a ton in July last year. For the same period, the export price for small customers dropped from R157 to R114 over the same period.
Eskom and Sasol are by far the largest coal consumers in the country, but require different grades of coal. Their prices have remained stable.
These figures were contained in the Competition Commission’s report on the proposed Lexshell and Wakefield merger. Lexshell, jointly owned by Shanduka and Glencore International, is also known as Shanduka Coal. Although the Commission recommended on February 22 that the merger go ahead with no conditions, as it was unlikely to substantially affect market prices, the Competition Tribunal is hearing the matter and will decide on the outcome.
“Market participants interviewed have all confirmed local prices were below net export prices up until two years ago, but that prices are now in line with net export prices. This reflects sharp price increases in 2005 and 2006. The merging parties [Lexshell and Wakefield] have submitted that the local price increases of thermal coal are because of increasing demand and the increased ability of producers to export their coal,” says the commission in its report.
Local prices for B-grade coal increased by about 50% in the past year for some producers, it says.
Almost all coal exports are sent through the Richards Bay Coal Terminal. In 2005, 69,2million tons of coal were exported through Richards Bay, out of a total of 71,4million tons exported. Until recently, only the established coal producers, who are shareholders in the facility, have had the right to export through the terminal. Anglo Coal, Ingwe Coal, Eyesizwe, Kangra, Sasol, Total Coal and Xstrata are all shareholders.
The Richards Bay terminal is planning to add 19million tons of extra capacity, which would allow new shareholders to buy into the company in order to use the additional tonnage. It has also allocated four million tons to emerging junior coal producers in its Quattro programme.
Companies using the terminal pay different fees according to whether they are shareholders or non-shareholders. Those with rights to export during the earlier phases of the terminal will pay lower tariffs than those with rights to export in later phases, although these may be the same companies. Different railage charges will also apply. This means that there is no single net export price, even for Richards Bay.
Mines based in Mpumalanga incur significant transport costs to supply Gauteng-based industries. Railage rates to Gauteng are 23c a kilometre, or about R30 a ton, according to information given to the commission. Road trucking costs are higher and are estimated at between 50c and 70c a kilometre. This puts mines from KwaZulu-Natal and Limpopo, and those without rail sidings, at a disadvantage.
Although Lexshell and Wakefield claim there is excess export capacity at Richards Bay, because the terminal is underutilised by coal producers, the commission says other factors are also relevant. Owing to severe floods in the first three months of last year, production from opencast mines dropped. Derailments on the coal line also impacted export volumes.
According to the commission, 22% of export production “and somewhat greater proportions in other cases” was not committed to particular customers on the export market. “In principle, therefore, substantial volumes initially earmarked for export could be redirected to the local market if local prices were to increase above prices being realised in the export market. Actual behaviour does not reflect this practice, with firms having quite different arrangements in the local market where prices are changed on a six-monthly or an annual basis with price changes in April and October,” says the commission. Coal traders operate either in local or in export markets, it says, not in both.
“As exports required access to constrained Richards Bay Coal Terminal allocations, while the local market operated in quite different conditions with prices far below export prices, firms were either in the export market or not. With export capacity becoming more readily available — either in the recent past or in the merging parties’ version or in the near future with the expansion of [the terminal] — this distinction breaks down,” says the report.
Coal customers are concerned that the merger will leave them with few alternative suppliers in the local market. The commission acknowledged that there were relatively few suppliers, with price increases apparently dictated to customers. But it found that as prices had already increased sharply, the merger would be unlikely to prevent or lessen competition.
The tribunal’s decision to hear the case despite the commission’s finding is a mark of how seriously it views the matter.