Over-legislation is seen as a bigger threat to South Africa's coal sector than renewable energy.
ANALYSIS
When a giant of the global coal industry that has operated for more than a century shuts up shop, things look pretty bad.
The news last week that United States coal giant Peabody Energy had finally filed for bankruptcy was just the latest in a list of large coal firms that have gone under. Peabody joined the likes of Arch Coal and Alpha Natural Resources that have faced a similar fate in recent months.
The demise of big coal in the US has been linked to the rise of competing sources of energy – including electricity from renewable technologies and abundant, cheap gas.
Similar pressures face the local coal sector as South Africa looks to diversify its energy mix. But, local analysts say, these risks are not as immediate as other pressures such as minerals policy and Eskom’s changing coal-buying plans.
The director for mining at Cadiz Corporate Solutions, Peter Major, said the threats to coal-fired power – such as tougher regulations and competition posed by alternative sources of power – are “further down the road” for the local coal industry than they have been for US producers.
“The US coal industry has always had lots of competitors,” Major said, whether it be nuclear energy, hydropower, cheap natural gas or, more recently, the advent of increasingly competitive renewable energies such as wind and solar.
Energy conservation
The US has also, after decades of wasting power, realised the advantages of energy conservation and is way ahead of South Africa in respect of efficiency, said Major. It is also ahead of the game when it comes to implementing pollution controls.
There are few countries in the world where coal makes up 85% of electricity generation, as is the case in South Africa. It is likely that we will have to begin paying a carbon tax on this electricity source – albeit at a discount, given our status as a developing country, he added.
But rising costs and tougher competition are not the immediate problems facing the local industry, argued Major. Against the backdrop of a depressed global climate for commodities South Africa’s industries, particularly mining, have been hurt by burdensome legislation and declining labour relations and productivity levels.
“It’s not the coal price; it’s not demand [that poses the greatest risk to the coal industry]. It is legislation and ideology,” said Major.
Since 1994, more than 2 000 new pieces of minerals legislation and regulation have been passed, shackling and smothering the sector, he said. There is little acknowledgment from the government that the cumulative effect of these laws and regulations is hugely damaging, he added, especially because none has “eased” the process of doing business.
Labour relations is another problem, he said. Labour productivity in the coal sector, unlike other mining sectors, has not declined, although it has not risen by much either. In other parts of the world, labour productivity has risen at between 2.5% and 15% over the past decade.
In recent months large mining houses such as BHP Billiton, which has housed its South African mines in its South32 operation, have either unbundled their local mining assets – or, in the case of Anglo American, pulling out of coal entirely.
Commercial differences
Glencore, after protracted commercial differences with Eskom over the performance of its Optimum Coal mine, was quick to put it into business rescue and see it sold off.
Every commodity company has been affected by the market downturn, said Mzila Mthenjane, executive head for strategy and stakeholder engagement at diversified miner Exxaro. They are re-evaluating their portfolios “both in terms of commodity and geographic diversification in order to save costs, preserve cash and realign their capital allocation”. He added that domestic issues amplify these decisions.
The outlook is not entirely bleak. Xavier Prévost, senior coal analyst at XMP Consulting, sees a future for South Africa’s coal industry, despite depressing international headlines and the 65% slump in international coal prices between 2010 and 2016.
But much depends on certain issues being addressed.
South African coal exports felt the same price declines that other producing nations did but, said Prévost, the internal market generated more than R56-billion in 2015, 17% more than the revenues derived from exports. Coal consumption for Eskom electricity generation is still a mainstay for the local industry and could be its salvation.
Despite recent declines in industrial power demand, the advent of the new Medupi and Kusile power stations and the entrance of independent coal-fired power stations could see consumption growing to 150-million tonnes a year.
Hurdles to sustainability
But there are hurdles to ensuring the sustainability of the local market, said Prévost. Chief among these is the need for new investment in local coal mines, in a deeply depressed climate and with little expectation that demand from key international markets such as India and China will increase to prop up exports.
In particular, the large collieries that supply Eskom on a cost-plus basis require additional investment. These are chiefly operated by global mining houses and supply more than 80% of Eskom’s coal requirements. Without it they cannot sustain levels of supply or increase it.
Uncertainty caused by proposed changes to minerals legislation is perhaps the greatest hindrance to attracting much-needed investment in the local coal sector, Prévost said.
Recently, the mineral resources department proposed changes to the Mining Charter, including the requirement for firms to maintain a 26% empowerment shareholding in perpetuity.
Another challenge is the growing belief that Eskom should no longer invest in tied collieries, but instead procure its coal through contracts with a number of suppliers.
Eskom said late last year it was overhauling its coal-sourcing strategy. Public Enterprises Minister Lynne Brown endorsed this in her budget vote speech this week. Despite being the country’s main coal consumer, Eskom has been unable to keep coal costs below inflation, said Brown, and was reviewing its arrangements with cost-plus mines.
Red flags
Should Eskom do away with all its cost-plus mines, the number of coal mines is likely to decline and production levels will continue to dwindle, said Prévost. And because exports no longer generate the large revenues they once did, the industry will face severe challenges, he warned.
Some of these issues were highlighted in 2013 in the South African Coal Road Map, compiled by the government, Eskom and the industry. Among the red flags raised was the need for certainty about minerals policy and licensing processes, as well as a commitment to resolving the issues delaying the investment in new coal projects. But, said Prévost: “We are doing exactly the opposite.”
The minerals policy issues notwithstanding, large mines are needed to supply Eskom, but “there are no present or future projects to create them”, he said.
Mthenjane said the problems foreseen in the road map at the time, especially that of generating sufficient electricity to meet economic growth, have subsided.
The current low economic growth outlook has given some breathing room to the need for rapid mine development. Current electricity infrastructure should suffice during this period, he said. At the same time, new developments such as renewables, battery storage and distributed energy, combined with electricity efficiency drives, “may nullify the need for further large-scale electricity generation infrastructure”.
Eskom had not responded to questions in time for publication.