Analysts say the fossil fuel’s boom will probably be short-lived as the turn to renewable energy picks up. (Photographer: Waldo Swiegers/Bloomberg via Getty Images)
Europe is entering what will likely be a bitter winter, as a Russia-induced energy crunch threatens power supplies and the continent is sent into a recession.
A tight energy market — made worse in recent weeks after Russia’s state-owned natural gas exporter Gazprom closed its main pipeline to Germany — has been a boon for South Africa’s coal exporters, which have enjoyed higher prices amid stronger demand.
Europe’s winter is set to extend coal’s hot streak, even as the world turns to renewables. However, efforts to initiate a green economy will continue to threaten producers, who find themselves increasingly on the outs.
The coal price surged to a new record high of around $460 per tonne earlier this week, amid continued robust demand and persistent Russia-related supply disruptions. The International Energy Agency (IEA) sees coal consumption in Europe rising by 7% in 2022 on top of last year’s 14% surge, with the continent now turning to seaborne coal from South Africa and elsewhere in the world.
In another statement representing the energy minister’s cynicism towards the green transition, Gwede Mantashe reportedly said last week that the excitement of moving from coal to renewables was becoming a myth and that Germany had painfully learnt of its effect on energy security.
A similar statement was made in coal exporter Thungela’s interim results, released almost a month ago. Thungela is South Africa’s largest exporter of power-station coal.
“Energy security, reliability and affordability concerns in Europe have highlighted the importance of coal in the energy transition, as it will remain a critical input for affordable and reliable power generation,” the results presentation noted.
Thungela, like other South African coal miners, recorded a stunning leap in earnings in the first half of 2022. The company’s net profit soared to R9.6-billion from the R351-million it made in the same period last year.
In an interview with the Mail & Guardian this week, Thungela chief executive July Ndlovu said the coal market going into Europe’s winter can be characterised by its volatility. “Volatile, volatile, volatile. We all tend to look at when we have one big spike, but we actually forget that there are down dips every day,” he said.
The comeback kid?
That said, based on demand and supply fundamentals, Thungela expects coal will remain a significant part of the energy mix, despite the world’s turn towards cleaner, more renewable energy.
Ndlovu pointed out that while many countries, including South Africa, plan to reach net-zero by 2050, as per the Paris Agreement, others — such as China and India — have later targets.
According to the IEA, demand for coal in India, the world’s second-biggest importer of the commodity behind China, is expected to rise almost 10% in 2022. India only plans to reach net-zero by 2070.
“If you think about net-zero, coal will be used well into the 2050s and 2060s. There is continued demand, in the first instance as economies recover from Covid … We can’t plan on the basis of these transitory price moves that we see, because then we just can’t make an informed decision.”
As energy economist Lungile Mashele explained, South Africa’s coal miners have underinvested as the country has been put on a greener trajectory. This has led to coal companies stockpiling funds for capital investments.
Mashele does not expect increased investment in the sector as a result of the current boom, which she forecasts will persist through the European winter into 2023.
“We have no reason to get excited about the prospect of coal making a comeback apart from the coal miners making a profit after years of underinvestment and stable performance. Because South Africa is a global player in coal markets this does bode well for South Africa’s economic growth and tax revenue,” she said.
On future investment, Thungela is looking at opportunities to diversify its operations to other parts of the world. However, Ndlovu said, this will only happen if the company has a clear chance of success.
Coal exporters actually stand to benefit from underinvestment. As Ndlovu explained, at worst, demand for coal will remain flat over the next decade or so. “It might marginally grow, as mines are beginning to deplete. We think that can only tighten the supply and demand equation, which is price supportive. That is the basis on which we make long-term decisions,” he said.
“And then what happens is you pick up these externalities, which are short term, like what has just happened in Europe. We think that once you set your business to be resilient, to be competitive, all you can do is really, really benefit from those kinds of exogenous factors.”
One thing that will hamstring future coal investment is commitments by major banks to no longer finance its mining. FirstRand and Nedbank have already ruled out funding investments in new coal mines.
The current coal boom has not prompted those banks to change their positions. In response to questions by the M&G, FirstRand said it remains committed to the parameters the group has set on coal as part of its climate policy.
“We believe existing working capital lines are sufficient to facilitate both the existing support for the Eskom grid as well as the increased level of exports currently experienced by the companies — so no changes are envisaged for what we view as a short term demand for exports.”
Kerri Savin, Nedbank’s senior manager for sustainability strategy and reporting, said the banking group’s energy policy is based on global science requirements to manage the impacts of climate change. “This long term view,” she said, “is required to protect our economy and societal wellbeing well past a short term impact on the energy requirements of another region.”
However, in the wake of the current crisis, energy security has increasingly become a rallying call by those pushing back on climate reporting and companies looking to divest from fossil fuels.
Republican lawmakers in the United States, for example, have taken a tough stance against these companies.
Last month Texas comptroller Glenn Hegar released a list of financial companies that boycott energy companies. Hegar is implementing a law that requires state pension and school funds to divest shares they hold in these companies.
Ndlovu said: “I think what we are beginning to see is that the overriding consideration in energy policy in the developed world is energy security. People are beginning to realise that this drive to squeeze investment out of coal and fossil fuels is at best an irresponsible approach from a policy point of view. So my expectation is you’ll continue to find funding.”
But, according to climate risk analyst at non-profit shareholder organisation Just Share Emma Schuster, the energy security argument holds little weight. Rather than encouraging further investment in fossil fuels, the energy crunch has underlined the importance of ramping up investment in renewable energy infrastructure, she said.
“Some European countries have temporarily returned to the use of coal-fired power to supply energy for this winter, but the momentum towards a global net-zero world has not been significantly disrupted,” Schuster said.
“The general acceptance that coal is on its way out, and that South Africa must transition away from it, is based on economic realities and long-term outlook.”