Owing to the lack of incentives and capital to implement new coal projects, coal production has remained stagnant, and some of the reserves of the older mines are nearing depletion, which means production will soon drop significantly, says coal industry and consulting firm XMP Consulting senior coal analyst Xavier Prévost.
According to Statistics South Africa, South African coal mining production contracted 0.9% year-on-year in September and 7.1% month-to-month, which resulted in coal production falling by 2%.
“Economists expected an improvement in overall fourth-quarter production . . . although each month that comprised the fourth quarter delivered a contraction in output.”
Prévost states that State-owned power utility Eskom’s demand for 51% black economic-empowerment ownership from coal suppliers played a role in the decision of mining and metals company South32 to separate the thermal coal business. He adds that, as a result, the company is scaling down its presence in South Africa. He adds that, for this same reason, diversified mining company Anglo American sold all its coal mines that supplied Eskom.
South Africa produced about 168.5-million tons of coal from January to August 2018; projected to year-end that equates to 252-million tons, which is the same production as 2017.
In its ‘Coal Strategy 2018’ report, the Minerals Council South Africa, formally known as the Chamber of Mines, says most local coal exports are destined for India, comprising about 45% of coal export volumes. India started to become an important market for South African coal in 2007, when sales volumes suddenly went up from 3% of total exports in 2006 to 13% in 2016.
“India became an important market because South Africa’s previous main market, the European Union (EU), ceased to buy South African coal and now imports more from Colombia. Also because the EU environmental laws prevent them from using as much coal as they used to,” Prévost explains.
The main exports markets for January to August 2018 for the 49.5-million tons of steam coal, comprise India, with 27.7-million tons; Pakistan, with 6.8-million tons; South Korea, with 5.4-million tons; the Netherlands, with 2.4-million tons; Mozambique, with 2.4-million tons; Taiwan, with 1.9-million tons; United Arab Emirates, with 1.5-millions tons; and Portugal, with 1.4-million tons.
However, Prévost notes that, since China’s cessation of coal imports, until end of 2018, the Richards Bay Coal Terminal (RBCT) coal prices have tumbled globally. London-based global information provider IHS Markit reports that a weekly average of 6 000 kcal/kg net as received (NAR) prices fell to $86.01/t freight on board (FOB) in November, down by 6% from the previous week and the lowest since August 2017. “It’s not a pretty picture right now with more than enough coal out there, prices of oil falling sharply, and the uncertainty over China.”
Some traders and producers were now opting to sell to South Africa’s domestic market, as exports are no longer an economically viable option. Average weekly 4 800 kcal/kg NAR prices dropped to $41.55/t FOB last month, down with 7% from the previous week and 23% lower than two months ago. The 5 500 kcal/kg NAR fell to $58.76/t FOB last week, a 6% drop from the previous week and down 20% from a month ago.
An average FOB cost of just under $50/t is forecast by IHS Markit analysts, which includes transport costs of around $13.50/t, meaning companies would lose more than $8/t to export 4 800 kcal/kg NAR from RBCT. This is good news for Eskom, which desperately needs 4-million tons of 4 300 kcal/kg to 5 500 kcal/kg NAR material by this month to keep the lights on. Eskom has so far secured only 1.1-million tons.
In the benchmark spot market, there was one index-setting trade for 6 000 kcal/kg NAR in Richards Bay last week, compared with none the previous week.
A 50 000 t cargo for this month traded at $81.50/t FOB with the exchange of futures for physical terms on November 23. For January, the best bid was $89.00/t FOB on November 20, and the best offer $88.50/t FOB on November 23.
With regard to logistics, the RBCT continues to struggle to work through a logjam after operations were halted earlier in November owing to bad weather.
IHS Markit shipping data showed 31 dry bulk carriers with a maximum capacity of 2.52-million tons anchored offshore RBCT, up slightly from the 27 vessels in November. As many as 43 ships were anchored at the height of the congestion earlier last month.
Moreover, Prevost mentions that most collieries are trying to optimise their coal production to supply coal to the inland and export markets, depending on where the best revenue is. Prévost adds that new mines are now needed to supply coal to Eskom and future independent power producers.
Further, strict environmental laws are one of the factors that have resulted in a significant decline in the use of coal globally. India has voluntarily agreed to reduce the greenhouse-gas emissions intensity of its gross domestic product by between 20% to 25% from 2005 to 2020. This has, to date, not affected South African coal exports to India.