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Featured Story Click title below for the full story

SA’s coal-fired
power path at risk
of becoming
a dead end

The cost of coal is a significant part of the cost of electricity-generation in SA. More than 90% of the country’s electrical energy comes from burning coal, and its generation consumes nearly half of all internal coal sales.

When Medupi and Kusile are fully operational, the coal demand will be about 150-megatonnes per year. The Department of Energy is encouraging some independent power producers to establish further coal-fired stations, which could boost the demand for coal even further.

Where does all this coal come from? Historically, most of it came from large coal mines. Some of these were "tied" collieries in which Eskom had invested capital, and that supplied coal on a cost-plus basis. These mines were linked to the power stations by enormous conveyor belts, so the costs of transport were low.

In recent years, coal has increasingly been sourced from small, independent collieries. In 2015, 18% of Eskom’s supply was from small independents. Two challenges emerged. First, the coal was moved by road, so the cost of transport was considerably higher. Second, it proved very difficult to control the quality of the supply. A typical power station, generating 3,600MW, will need a 30-tonne truckload of good quality coal each minute of every day, and more often if the coal quality is poor.

It is difficult to tell a good load from a bad one. Eskom had to establish testing facilities at some mines to stop delivery of substandard material. This challenge does not arise when coal is delivered by belt, because sampling and quality control is far simpler.

In 2015, coal from the larger collieries cost Eskom of the order of R150 per tonne, and that from the smaller producers, about R400 per tonne. The larger collieries not only faced a lower price for their product, but many of them were exhausting the readily mined coal and needed recapitalisation. Eskom, short of cash, is understandably not interested in reinvesting and wishes only to purchase on contract.

In the current climate, nobody else is particularly keen to invest in the coal business. It does not help that export prices are at a low ebb: the year 2015 was the first for a long time that export revenues were lower than domestic sales, even with a weak rand. To add to coal’s woes, there are environmental ambitions to reduce greenhouse gas emissions, and coal is a primary source.

We call them "ambitions", because coal provides more than 90% of SA’s electrical energy. Replacing that 90% with some other source would demand far more capital than the country can raise in the next 20 years. SA is stuck with an ongoing need for coal for at least a generation.

The country needs coal, but there seems to be a blindness about where in only a few years’ time that coal is going to come from. The supply from existing mines is drying up. There has been plenty of exploration, and new reserves have been identified, but investment is needed now if power generation is to continue beyond 2020.

One plan that appears well advanced is to fuel the Mpumalanga power stations with coal from the Waterberg. There are several small miners waiting in the wings, while Exxaro’s Grootegeluk mine could readily create more capacity than that needed for Medupi. Transnet has undertaken extensive design work on a line from Lephalale to Emalahleni, but it will take at least five years to construct. Coal could be supplied from the Waterberg early in the 2020s, so work needs to start now. However, the costs of transport will be significant.

Investment in the industry will follow only if coal prices increase. They have been rising, but too slowly to attract investment. Even these relatively modest price increases have worried some in the government.

There has been a proposal by the National Energy Regulator of SA (Nersa) to change its methodology for determining multiyear electricity pricing. If Nersa has its way, Eskom will have to account for the coal purchases by each power station. It will have to show that it is using the coal efficiently and is controlling the quality of coal supplied properly. Nersa intends to set different pricing structures for the cost-plus mines, for coal purchased on fixed-price contracts and on short-term contracts. To add to the challenge, the energy minister announced in her recent budget speech that she intends to start a super-regulator to check Nersa’s decisions. So, Eskom management’s decisions will be second-guessed by Nersa, whose decisions will be second-guessed by a new super-regulator. As a recipe for disaster, it has few equals.

The last time there was this sort of interference with market mechanisms in the energy supply industry, Nersa’s predecessor, the National Electricity Regulator, fought the good fight against inflation by controlling Eskom’s price increases below the consumer price index. For a few years, the cheapest power in the world became even cheaper. Then the bubble burst, and the country suffered blackouts, as well as huge price increases.

SA has still not recovered from the damage to the economy. The cost when the first outages occurred was about R75/kWh. As the economy adjusted to the lack of supply, the cost dropped. People installed their own generators, and took other steps to mitigate the disaster. Today, the cost of lost power is of the order of R7/kWh. That is twice what it costs Eskom to run its diesel-fired gas turbines, but it keeps the lifts working and the supermarket fridges cold.

What it does not do is allow the unrestricted growth of industry. Since 2008, we estimate that about 60 major projects that could have created more than 100,000 jobs have been cancelled because the power needed to run them was not available.

There is a thesis that the growth in the economy and the supply of energy are no longer linked. Any study of global economies soon shows that this thesis is flawed, to put it politely. SA’s growth and energy supply were in lockstep for 50 years. China’s economy and its power generation have similarly been linked for 25 years.

SA needs power to restore growth. Past investment in coal-fired generation means SA is locked into coal for the foreseeable future. It is critically important to recognise that the coal industry needs investment, and that investment will not happen while the government talks about introducing price controls. Eskom’s procurement policies, requiring all coal suppliers to have more than 50% black ownership, are making the challenge all the more challenging.

Where, oh where, is SA’s coal going to come from?

• Lloyd is a professor at the Cape Peninsula University of Technology; Prevost is a consultant to the coal industry

By by Philip Lloyd and Xavier Prevost. Published on June 13 2016 by BDlive.

This month's top international coal headlines

  • South African coal volatile — Platts CTI
  • Richards Bay FOB ticks up — Platts CTI
  • South African coal steady on high offers — Platts CTI
  • South African prices slide despite deals — Platts CTI
  • South Africa FOB prices under pressure on limited demand — Platts CTI
  • Volatility in South African prices limits Indian buying — Platts CTI
  • South African prices rise over $1.50 — Platts CTI
  • Thermal coal futures so bright, you gotta wear shades — Platts CTI
  • Richards Bay FOB slips — Platts CTI
  • Unloved coal seen surging as China cuts collide with La Nina — Bloomberg
  • South Africa market still lethargic — Platts CTI
  • S Africa’s Transnet completes first phase of coal rail line expansion — Platts CTI
  • South African market also gains — Platts CTI
  • South African price rise dampens Indian interest — Platts CTI
  • S African May thermal coal exports slip 2.8% on-year to 6.48 million mt
    — Platts CTI
  • South Africa quiet — Platts CTI
  • Transnet coal line shuts down for two weeks — Caxton News Service
  • South Africa market remains flat — Platts CTI
  • Indian buyers find alternatives to high priced S African coal — Platts CTI
  • No trades in South African market — Platts CTI
  • Volatile S African coal prices limit buying from India — Platts CTI

2016 archive

June 2016
  • South African spot prices edge higher — Platts CTI
  • South African coal faces competition — Platts CTI
  • S Africa's Transnet sets coal export rail line maintenance for July 11-24
    — Platts CTI
  • South African thermal spot recovers over $1 as discount to paper narrows
    — Platts CTI
  • South African Transnet 2015/16 export coal railings down 5.5% on-year
    — Platts CTI
  • South African physical-paper spread widens — Platts CTI
  • Indian demand for S African thermal coal subdued amid price volatility
    — Platts CTI
  • Coal’s Role in ASEAN Energy — Cornerstone
  • SA exporters see possible opportunities in domestic market — Platts CTI
  • South African prices break with derivative rally — Platts CTI
  • Richards Bay holds levels — Platts CTI
  • Richards Bay FOB edges up — Platts CTI
  • Less South African coal imports — Platts CTI
  • High South African coal prices stifle Indian buying interest — Platts CTI
  • Richards Bay FOB steady — Platts CTI
  • Price volatility limits Indian buying interest for South African coal — Platts CTI
  • Richards Bay FOB spot gains for third day — Platts CTI
  • Polygeneration as a Means to Reduce Energy Poverty in Pakistan
    — Cornerstone
  • Richards Bay FOB gains further — Platts CTI
  • Richards Bay FOB trades higher — Platts CTI
  • Richards Bay FOB spot stable — Platts CTI
  • SA’s coal-fired power path at risk of becoming a dead end — BDlive
  • Slide in CIF ARA and South African thermal derivatives markets continues
    — Platts CTI
  • CIF ARA and South African paper markets fall back after profit taking
    — Platts CTI
  • High S African thermal coal price saps Indian buying interest — Platts CTI
  • Higher S African coal prices limit trades in Indian thermal market — Platts CTI
  • Indonesian thermal buying interest seen returning as S African prices rise
    — Platts CTI
  • Richards Bay 6,000 NAR spot hits $60/t — Platts CTI
  • Supply tight, Indian thermal buyers seek S African coal — Platts CTI
  • S African prices boosted by deal — Platts CTI
  • Colombian thermal coal heads to Middle East in rare move — Platts CTI
  • US Coal Market Update — Scotia Howard Weil
  • Uncertainty sparks index trading in Richards Bay — Platts CTI
  • What’s Driving India’s Coal Demand Growth — Cornerstone
May 2016
  • Richards Bay pushes higher on offers, bids — Platts CTI
  • RBCT CEO to stand down — Mining Weekly
  • Richards Bay FOB spot loses almost $1 — Platts CTI
  • South African FOB remains under pressure — Platts CTI
  • Indian interest for South African thermal coal returns — Platts CTI
  • Fueling Increased Electricity Production — Cornerstone
  • Saudi Arabia’s pipe dreams, Germany’s baseload problems, new hopes for coal and gas power — ENERGY WATCH
  • South African prices drop further — Platts CTI
  • India Power Report — BMI Research
  • South African FOB market cools — Platts CTI
  • China and India could destabilize global coal market — eia
  • South African FOB gains on higher deals — Platts CTI
  • Deals for SA coal in India amid cautious sentiment — Platts CTI
  • South African FOB climbs to month-highs — Platts CTI
  • Coal sector to continue to be significant source of employment, says Anglo American Coal SA head — Engineering News
  • Richards Bay FOB spot gains almost $1 — Platts CTI
  • S African coal mining production down 16% on-year in March: Statistics SA
    — Platts CTI
  • Richards Bay FOB thermal spot slips on increased availability — Platts CTI
  • Indian buyers seek off-spec South African coal — Platts CTI
  • Indian demand for South African coal limited by high prices — Platts CTI
  • Richards Bay FOB spot moves lower — Platts CTI
  • S African FOB gains on higher physical deals — Platts CTI
  • Eskom also responsible for above-inflation coal hike — Miningmx
  • It’s not a case of all or none – Let’s face it. Coal is on the nose — World Coal
  • South African FOB posts gains over quiet session — Platts CTI
  • Coal is at a turning point — Coaltrans Conferences
  • Pressure builds on S African prompt — Platts CTI
  • South African March exports to India hit record high — Platts CTI
  • South African physical thermal deals spark reductions — Platts CTI
  • Coal Rally Won’t Last — Barrons
April 2016
  • High South African offers limit trade in India — Platts CTI
  • More Richards Bay FOB downside needed to attract demand: traders
    — Platts CTI
  • IHS Identifies Top Five Trends in 2016 That Will Shape the Global Maritime Industry for the Coming Decade — IHS
  • Jitters as US coal firms go bankrupt — Mail & Guardian
  • China and India could destabilize global coal market — Global Risk Insights
  • Australian coal prices plummet as Colombian cargoes head to Asia — Reuters
  • Behind the scenes BHP Billiton fears for thermal coal’s future — CoalWire
  • Eskom may lay claim to private coal mine assets — BD Live
  • South African supply tight — Platts CTI
  • Anglo’s Coal-Mine Sales Said Slowed by South African Utility — Bloomberg
  • India’s Energy Minister Wants to Cut Coal Imports to Nothing — Bloomberg
  • Eskom to breathe new life into ageing fleet — BD Live
  • South African FOB prices lose more than $1 on lower offers — Platts CTI
  • South African FOB prices sustain heavy losses — Platts CTI
  • High South African coal prices limit Indian buying — Platts CTI
  • World Coal Association says coal has a robust future regardless of climate change — Newcastle Herald
  • Has China’s coal use peaked? Here’s how to read the tea leaves — Reuters
  • Indian demand for S African coal seen, but cargoes limited — Platts CTI
  • South African FOB prices higher on concluded deal — Platts CTI
  • Murray Energy CEO on What's Smothering the Coal Industry — Fox Business
  • What Was The Primary Cause Of The Coal Crash? — Oilprice
  • Traders fear liquidity squeeze in South African coal market — Platts
  • Coal: Get out when you can — Financial Mail
  • Asia won’t abandon coal — World Coal
  • South African spot moves higher — Platts CTI
  • Richards Bay FOB spot gains further — Platts CTI
  • Anglo asset sales readying group for a takeover, says analyst — Miningmx
  • Well-bid Richards Bay FOB spot jumps to recover over $1 — Platts CTI
  • Interview with Frans Kesuma, President Director, PT Pamapersada Nusantara — Coaltrans Conferences
  • Physical Richards Bay thermal rebounds to claw back 45 cents — Platts CTI
  • Richards Bay May trades at $53/mt FOB — Platts CTI
  • Richards Bay physical thermal slumps $2 amid paper sell-off — Platts CTI
  • SA coal exports heading off a cliff? — Mineweb
  • Richards Bay spot thermal coal falls as offers increase — Platts CTI
  • S African coal deals in India limited amid price volatility — Platts CTI
  • Coal price hopes fade amid reality of slowing Asia demand: Russell — Reuters
  • How layoffs could signal better days for coal, or not — Star Tribune
  • RB softens, May still well bid — Platts CTI
  • S African Feb exports slip 19.7% on year to 8-month low of 4.82 million mt
    — Platts CTI
  • Richards Bay FOB thermal spot moves lower as demand remains dormant
    — Platts CTI
  • Traders fear liquidity squeeze in South African coal market — Platts CTI
  • Corporate Debt Defaults Explode To Catastrophic Levels Not Seen Since The Last Financial Crisis — Economic Collapse
March 2016
  • The coal conundrum — MIT Technology Review
  • Richards Bay FOB thermal coal spot steady, remains overpriced — Platts CTI
  • Richards Bay FOB spot gains almost $1 — Platts CTI
  • Richards Bay FOB spot steady — Platts CTI
  • Better outlook for South African coal — Platts CTI
  • The Sun Is Rising On Coal — Seeking Alpha
  • Has U.S. Nuclear Power's Death Spiral Begun? — IEEE Spectrum
  • The future of coal: the long comedown — RenewEconomy
  • South African FOB prices rally — Platts CTI
  • Indian power plant coal stocks hit new record high over 38Mt: CEA — Platts CTI
  • Rio’s Zululand Anthracite Colliery output unaffected despite sabotage, violence — Miningmx
  • Drought hits Indian coal plants and plans — Coalwire
  • The Death Of Thermal Coal And Its Transition To A Stranded Asset
    — Seeking Alpha
  • The return of 21st Century Coal — World Coal
  • Indian buyers cautious of volatile S African coal prices — Platts CTI
  • South African FOB spot reverses downtrend, posts $1 gains — Platts CTI
  • India’s Growing Impact On Maritime Trade — Seeking Alpha
  • Why investors are dumping coal — Politico
  • New Hope predicts flat thermal coal prices — SBS News
  • Indian buyers wait for S African thermal prices to fall further — Platts CTI
  • How did the world’s miners not see it coming? — Reuters
  • South Africa Coal Projects Collide With Water Scarcity, Financial Turmoil
    — Circle of Blue
  • South African FOB prices under pressure on keen selling interest — Platts CTI
  • Why Investment In Coal No Longer Makes Sense — Seeking Alpha
  • Coal baseload bidder expects IPP project evaluation to begin early April
    — Mining Weekly
  • Richards Bay FOB drops over $2 — Platts CTI
  • Richards Bay FOB spot steady — Platts CTI
  • Giants Topple In The Beleaguered Coal Industry — Oilprice
  • Richards Bay FOB slips another $1 — Platts CTI
  • Richards Bay FOB moves in opposite direction — Platts CTI
  • South African FOB prices edge up amid thin activity — Platts CTI
  • Last Gasp for Coal Mining Industry? — Fox Business
  • Molefe, Brown consign ‘coal supply cliff’ to history — Miningmx
  • Are You Kidding Me? Chinese Exports Plunge 25.4 Percent Compared To Last Year — The Economic Collapse
  • Coal in the energy mix of China — World Coal Association
  • High South African coal offers meet little Indian buying interest — Platts CTI
  • Richards Bay thermal spot prices surge on thin supply — Platts CTI
  • Indonesia may have to import coal for future power plants: Study
    — The Jakarta Post
  • Indonesia swims against the global green tide with its new coal commitments — Equal Times
  • Richards Bay FOB spot follows CIF ARA up — Platts CTI
  • S. African Exxaro’s 2015 coal production jumps 7% to 41.8 million mt
    — Platts CTI
  • S African Jan thermal coal exports slip 7.2% on-year to 6.16 million mt
    — Platts CTI
  • Glencore positive on coal turnaround — Mining Weekly
February 2016
  • Richards Bay FOB spot price stable — Platts CTI
  • Richards Bay FOB spot prices edge down — Platts CTI
  • Richards Bay FOB levels ‘far from reality’ — Platts CTI
  • South Africa prices edge up on confirmed trades — Platts CTI
  • FOB Richards Bay rises on higher offers — Platts CTI
  • Richards Bay drops on recent deals — Platts CTI
  • Richards Bay FOB floor pushed lower: traders — Platts CTI
  • High bids continue to boost Richards Bay FOB thermal spot — Platts CTI
  • Richards Bay FOB thermal spot rises despite lack of competitiveness
    — Platts CTI
  • Richards Bay finds alternative destinations — Platts CTI
  • South African coal demand muted — Platts CTI
  • Downtrend on FOB Richards Bay relents on prompt deal — Platts CTI
  • FOB Richards Bay registers another $1/t reduction — Platts CTI
  • Richards Bay FOB under pressure despite low stock — Platts CTI
  • Richards Bay spot moves lower on weak demand — Platts CTI
  • Richards Bay FOB thermal spot loses ground on low demand — Platts CTI
  • Indonesian thermal coal finds support in Australia, S Africa price rises
    — Platts CTI
  • South African coal prices rise — Platts CTI
  • Richards Bay FOB spot remains at 2-month high — Platts CTI
  • South African thermal Q2-2016 futures gain on strong bids — Platts CTI
  • Richards Bay FOB thermal spot edges higher amid prompt tightness
    — Platts CTI
  • South African 2015 thermal coal exports climb 1.3% on-year to 75.4 million mt — Platts CTI
January 2016
  • South African 2015 thermal coal exports climb 1.3% on-year to 75.4Mt
    — Platts CTI
  • Rallying South African FOB prices create arb potential for Colombia: traders
    — Platts CTI
  • Richards Bay FOB thermal spot edges higher amid prompt tightness
    — Platts CTI
  • FOB Richards Bay thermal surges on buying rebound — Platts CTI
  • Cost-plus mines under scrutiny as Eskom rolls out new coal procurement strategy — Mining Weekly
  • Bid, offer gap limits South African thermal coal trades in India — Platts CTI
  • FOB Richards Bay steady on limited trade — Platts CTI
  • Richards Bay FOB spot continues to trend down — Platts CTI
  • Prompt demand for FOB Richards Bay stems losses — Platts CTI
  • FOB Richards Bay dips to end bull-run as trading slows — Platts CTI
  • FOB Richards Bay Cal-17 also rises over $1 — Platts CTI
  • Richards Bay FOB spot continues to gain ground on short-covering — Platts CTI
  • South 32’s Jul-Dec thermal coal output falls 2% on-year to 17Mt — Platts CTI
  • More buying interest for South African coal — Platts CTI
  • FOB Richards Bay paper supported by spot bidding — Platts CTI
  • Richards Bay physical thermal surges as buying interest rebounds — Platts CTI
  • FOB Richards Bay thermal spot moves higher on re-emerging demand
    — Platts CTI
  • Richards Bay FOB gains as buyers return to market — Platts CTI
  • South Africa’s RBCT exports record 75.4Mt of coal in 2015 — Platts CTI
  • FOB Richards Bay spot edges higher — Platts CTI
  • Policy uncertainty, DMR leadership ‘challenges’, weak prices bode ill for mining sector in 2016 — Mining Weekly
  • FOB Richards Bay drops to over two-week low — Platts CTI
  • Tight supply for S African 5,500 NAR coal — Platts CTI
  • FOB Richards Bay spot price steadies — Platts CTI
  • FOB Richards Bay spot price flat on-day — Platts CTI
  • FOB Richards Bay sheds 15 cents on-day — Platts CTI
  • Pressure on FOB Richards Bay futures — Platts CTI
  • FOB Richards Bay spot price drops $2.50 following lack of strong bids
    — Platts CTI
  • Thermal coal markets start 2016 warily as demand outlook remains bleak
    — Reuters Africa
  • S African coal prices edge up in Indian market on limited supply — Platts CTI
  • FOB Richards Bay unchanged on-day — Platts CTI
  • After Paris, the future of Australian coal is downhill — The Conversation
  • Interest for S African coal increases — Platts CTI
  • FOB Richards Bay firms 50 cents on-day — Platts CTI
  • FOB Richards Bay spot price steady — Platts CTI
  • FOB Richards Bay jumps almost $2 amid spot trading spree — Platts CTI
  • S African Nov thermal coal exports up 14% on-year to 6.9Mt — Platts CTI

2015 archive

 

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