“The discretion the strategic mineral
clause affords the minister to interfere
[with the market pricing mechanisms]
will be seen as more regulatory
ambiguity,” a mining analyst at
South Africa’s MomentumAsset
Management said.
Lawyers continue to claim that the
original empowerment legislation was
poorly drafted because of pressure on
the government to improve the lot of all
workers, especially mineworkers.
Under the banner of giving the workers
ownership of their industry and to stem
a rising-tide of criticism, it had not only
been looking for political kudos but
also keen to make the companies more
financially responsible for the provision
of social amenities, housing, education,
training and health care. Poorly drafted
or not, the legislation is under
increasing scrutiny – and too often not
able to provide answers.
The problem of power
Domestic coal trade, 90% and more of
which is with Eskom, is, say reports, in
tatters. Analysts say that
Goldman Sachs is informally advising
the South African Treasury on the sale
of state assets to raise money to fund
projects for the state power utility and
clear its debt – which is largely due to
the government.
The Treasury tacitly confirmed this,
saying that “given Eskom’s constrained
balance sheet, and government’s
constrained financial position,
consideration is being given to
ring-fencing and selling stakes in
Eskom’s non-core businesses or power
stations, as well as in Eskom’s business
as a whole.”
An initial target is to fill a cash flow
shortfall of R225 billion (US$19 billion)
to enable Eskom to build new and
update existing generation capacity, as
it starts to hit home that a national
energy baseload cannot be built on
renewable energy sources and that a
headlong dive into nuclear generation
might not be the solution everyone is
hoping for.
Two coal-fired power plants under
construction, Medupi and Kusile,
which will deliver a total 10 000 MW,
are 4 yr behind schedule. The official
2015 economic growth forecast of 2%
assumes Medupi in at least initial
production of 800 MW.
Coal supplies for either plant have
not yet been secured, as Eskom has
decided that it will buy the majority of
the coal it needs from companies that
have at least a 51% black shareholding
level – 25 points above the BBBEE
requirement.
Eskom needs not only to worry
about its bank and credit ratings. There
will be renewables. In the country’s
Integrated Resource Plan 2010, the
government proudly announced the
end of coal-fired power and the
development of a baseload based on
renewables by around 2025. Half a
decade on, it has already been
announced alongside renewables, there
will be nuclear. That could compound
Eskom’s worries. It has been
announced that the utility will not be in
charge of the nuclear‑energy
programme.
Bidding to open an independent
power producer (IPP) programme to
develop a designated baseload for
coal-generated power was expected to
begin in November 2014. The
government said that the programme,
which had, until then, focused on
renewable energy, would be extended
to include 2500 MW of coal projects and
800 MW of coal generation (the
difference between these two types of
project was not explained). There are no
reports of progress.
However, Tina Joemat-Pettersson,
the Minister of Energy, has announced
a target of 9600 MW nuclear
generation over the next 10 yr. She
intends to focus on and accelerate all
matters that would lead to the
commencement of the nuclear-build
programme. Already 25 would-be
South African nuclear engineers are
being trained in China, which along
with Russia, France, the US and
South Korea is one of the countries
that has been negotiating nuclear
co-operation with South Africa.
On the edge
Eskom is, in many respects, a
barometer of the South African coal
industry’s fortunes. Historically,
power plants were built at the mines,
which were developed at the behest of,
and funded wholly or partly by, the
power utility. It then bought the coal
produced on a cost-plus basis. These
mines kept the industry in business.
As export trade started and grew, it
gave them substantial profits on top.
This still applies in many cases –
maybe not via mine-mouth situations
but with the mines tied into Eskom
cost-plus contracts. It has been and
remains key to the success of many
small miners and new (black) entrants
to the industry.
The power utility is now being
described as on the edge of a disaster.
Its fall could shake many existing
miners, juniors and majors – and dash
the hopes of many of those hopeful of
entering the industry.
Many of its coal supply contracts
are due to expire, while one new
power plant has lagged behind in its
demand for coal. Construction of a
proposed new coal mine to feed
another planned power plant has not
yet started.
It is also some concern that coal
grades, previously consumed only by
Eskom, are now being exported in
large volumes for use in Indian power
plants and also for blending. This is
more than likely happening because
the export trade commands higher
prices than Eskom will pay.
At the recent Investing in Africa
Mining Indaba, Eskom estimated it
needed ‘only’ 2.35 billion t of coal for
the long term. It then added that
22 million tpy of coal would be
sourced from new agreements. The
good news was that the majority of the
uncontracted coal had, at least, been
identified. Yet, a senior coal mining
executive estimates that Eskom needs
to contract at least 40 million tpy of
coal for the next 10 yr.
Eskom’s new insistence that it will
favour suppliers that have a 51% black
shareolding is compounding its
difficulties. Mines of a size to supply
the amount of coal it needs will be
huge operations requiring capital
investment well beyond junior miners
and new (black) entrants to the
industry. Even large companies will
find it hard to find that amount of
financial support given the present
parlous state of the industry.
20
|
World Coal
|
June 2015
