In this opinion article, independent economic risk consultant Rob Jeffrey argues that the mining industry and coal industry need to fight for their very future otherwise all is lost.
Few people realise that future economic, political and social prosperity are at currently stake. Decisions made in the near future will drastically affect the country for a generation, let alone a decade. It is necessary to examine recent economic trends in order to understand the extent of the county's problems and give guidance to on the decisions that need to be made.
THE NECESSITY TO REINDUSTRIALISE AND REDEVELOP THE MINING INDUSTRY
The past few decades have seen radical deindustrialisation of the economy.
The mining sector has shown little or no growth for decades. Since 1986, the mining sector has fallen from representing about 13% of gross domestic product (GDP) to 7% of GDP, the secondary sector has fallen from 30% to approximately 21%. The tertiary sector has grown from 51% to 69% of GDP.
The last seven years since 2008 have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, while agricultural growth has averaged only 1% a year. Financial services and personal service growth have averaged 2.4% and 2.8% a year respectively and government services 3.3% a year. The declines in these two sectors have resulted in serious structural economic problems.
The mining and manufacturing industries account for over 60% of the country's exports. Little wonder that South Africa faces a deficit on its balance of trade. These two industries and agriculture tend to employ proportionally fewer skilled workers.
Since 1995, the population has grown from 45-million to 56-million, but unemployment has grown from 3.7-million to 7.7-million. Since 2008, only half a million jobs have been created, almost all of which have been in the services sector, primarily in the public and government sectors. Unemployment is forecast to increase by over one-million by 2020. If ongoing, this is unsustainable.
Quite correctly there have been calls from these major economic sectors to government to assist in creating growth in these sectors. The Energy Intensive Users Group of Southern Africa (EIUG) has called for urgent intervention to halt what it describes as the current “downward spiral” of a shrinking electricity sales base and increasing and unaffordable electricity tariffs.
The EIUG represents 32 mostly mining and industrial companies accounting for more than 40% of the country’s electrical energy consumption and its appeal comes against the backdrop of Eskom’s latest application for a 19.9% tariff increase from April 1 next year. The mining industry is in decline. The Chamber of Mines has made clear its concerns. Policy is one major issue.
There are some that believe the mining industry is past the point of no return. The issue is not just the decline. It is the loss of skills, intellectual capital, infrastructure and in particular organisational and planning ability at government level. It has been said that mining companies are turning to other countries that are more investor friendly and are open to ideas for development.
Apart from policy issues, in the future, one factor at the core of this reindustrialisation and redevelopment process is electricity. These industries are electricity intensive. If growth is to be restored, they require secure baseload electricity at competitive prices. Current plans being put forward by the Council for Scientific and Industrial Research (CSIR) and appearing in the draft Integrated Resource Plan 2016 will see a major decline in one important component of the mining sector, namely coal. This will have major ramifications throughout the economy and will detrimentally impact the very sectors that most urgently need to be developed.
Unfortunately, the coal industry's fate is being determined by and based on three major, highly flawed arguments being used against it.
COAL AND MASSIVE POLLUTION
The first flawed argument is the view that coal-fired power stations cause mass pollution. It is perfectly true that such power stations, and their associated mining operations, used to be massive pollutants of the air and their environment. However, over the years, Eskom has made enormous progress in reducing pollution.
Particulate matter and emissions have been reduced 90% over 35 years. New High Efficiency Low Emissions (HELE) or ‘clean coal’ power stations will reduce pollutants further. As an example, the installation of flue-gas desulphurisation (FGD) at Kusile removes oxides of sulphur, such as sulphur dioxide.
Not only that, but carbon dioxide (CO2) emissions of HELE power stations are some 30% to 50% less than previous generation power stations. This puts them in a category close to gas power station emissions. In any event, CO2 is not the environmental disaster the ideologists claim.
There is substantial research on this subject by world renowned experts supporting this view. They include Dr Patrick Moore, co-founder of Greenpeace and Dr James Lovelock, proposer of the Gaia Hypothesis.
Apart from the well-known Milankovic cycles, solar experts in Asia, the Middle East and parts of Europe believe it is the sun that is the major cause of climate change. According to Dr Neil Frank, former director of the US National Hurricane Centre, the centre has, over the past three-and-a-half years published over 400 papers that discredit CO2 and support natural cycles of the sun.
Among many others, the conclusion of a landmark paper – entitled 'Emission budgets and pathways consistent with limiting warming to 1.5 °C', by Richard J Miller et al, in Nature Geoscience, 2017 – is that the computer models have overstated the impact of CO2 on climate and that the planet is warming more slowly than predicted.
WIND POWER IS CHEAPER THAN COAL
The second blatant flawed argument is the myth that wind power is far cheaper than coal-fired power or nuclear power. This is totally dispelled by a recent Australian Research study by GHD and Solstice Development Services entitled 'HELE Power Station Cost and Efficiency Report', which estimated that with efficient construction and production, generation costs would be between 41.3c/kWh and 80.5c/kWh compared to Kusile estimates running at about R1.20/kWh and latest estimates for nuclear of R1.20/kWh. These domestic costs could clearly be substantially reduced.
Furthermore, this price is for power generation over 80% of the time. It is, therefore, far cheaper than wind and solar at 65c/kWh but which generates power less predictably and for less than 35% of the time. A simple calculation shows that on a comparable basis, the equivalent price for power 80% of the time is a minimum of R1.48/kWh.
The CSIR has plans for high-penetration wind in South Africa involving over 100 000 MW of wind energy capacity covering over 100 000 km2 of land. Apart from the huge environmental damage, a report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by MD Sklar-Chik et al, in the South African Journal of Industrial Engineering, December 2016, concludes that “LCOE neglects certain key terms such as inflation, integration costs and system costs”. They note, “Many international reports prove that such electricity supply is extremely expensive due to its variability, interruptibility, inefficiency and its requirement of 100% backup”.
Another study by BP Heard et al entitled ‘Burden of proof: A comprehensive review of the feasibility of 100% renewable-electricity systems’ concluded that “there is no empirical or historical evidence that demonstrates that such systems are in fact feasible”. They also reviewed the CSIR proposals. The study concluded “both the use of the terms ‘technically feasible’ and the attempted costing of the proposed system are inappropriate and premature”.
Germany is trying to develop new markets in Africa and South Africa. Yet, Germany have now curbed their own domestic renewables expansion plans. This is not surprising. They are experiencing growing integration costs and other problems associated with large-scale wind. Fritz Vahrenholt in his study entitled ‘Germany’s Energiewende: A Disaster in the Making’ sums up the situation. “It will take a long time to repair the severe damage caused by a misled energy policy”.
In 2016, it must be noted that the prices paid by industry in Germany were 52% higher than in France (nuclear) and 86% higher than Poland (coal). Clearly, South Africa cannot allow this to happen. A research report by D Weißbach et al (2013) on energy returned from energy invested (EROI) in Germany showed that renewables are uneconomic and will lead to economic stagnation, whereas the EROI of coal and nuclear are in territory that fosters growth.
It certainly is a fact that all major economies with fossil fuel reserves are substantially increasing their electricity supply from these resources, including India, China, the Asean countries, Poland and now the US. In the US, the long-term decline in employment has been reversed. Energy actions have paid job dividends in coal country. The Department of Labour reported mining jobs in America grew by 11 000 in March and by another 7 000 in May. In June, EPA Administrator Scott Pruitt said the US had since the beginning of 2017 added more than 50 000 jobs throughout the coal supply and use chain.
ENERGY AND MINING POLICY UNCERTAINTY
The third major problem that all business, but particularly the mining industry, including the coal industry, face, is the current policy uncertainty in the country. This is a critical issue that is quite correctly being raised by the Chamber of Mines. There is a complete lack of confidence caused by political and economic policy uncertainty. A recent survey shows that business confidence in South Africa has plummeted to its lowest level in more than 30 years as political uncertainty, unemployment and dwindling trade weighed heavily.
South Africa occupied the eleventh position out of the top 25 rated countries in the AT Kearney Foreign Direct Investment (FDI) Confidence index in 2012. In 2016, it dropped to the twenty-fifth position.
South Africa’s has also declined on the 2017 Fragile States Index. Ten years ago, South Africa was ranked in the stable category, but now falls in the elevated warning category. It is hardly surprising that the three key ratings agencies S&P's, Moody’s and Fitch have all downgraded South Africa and have it on a negative watch. The list of policy uncertainty includes State capture and corruption, the potential implementation of Mining Charter Three, the threat of interference to the independence of the South African Reserve Bank, attacks on “white capitalism,” as well as a host of often well-meaning but damaging regulatory laws that often interfere in various markets ranging from labour through to purchasing and investment policies and hamper market efficiency and effectiveness.
THE FUTURE OF COAL AND COAL MINING IN SOUTH AFRICA TO 2050
The above leaves the mining industry and the coal industry, in particular, in a deeply concerning and uncertain position. There are basically two stark choices.
The first major shock could be a decision to effectively close all coal-fired power stations between now and 2050 and go with renewables. This decision will lead to a steady decline throughout the mining industry, particularly the coal mining industry. In fact, the mining industry is already in a perilous situation and such a decision could well be the final nail in the coffin for the mining industry.
The decision would ensure substantially slower growth throughout the entire economy and will have an extensive negative effect on the industrial and manufacturing sectors. In the short term, the impact on coal exports may be insignificant, in fact they may even enhance exports. Eventually, however, lack of domestic demand will affect competitiveness.
Any major decline of the coal industry and industries associated with it will have a profound negative impact on the economy. It is estimated that Eskom’s demand for coal would fall away totally by shortly after 2050, once Kusile and Medupi are retired. The coal sector would shrink by effectively 46%. This will reduce the GDP of South Africa by over 2.5% or R75.2-billion given the direct, indirect and induced impact. Compensation of employees would be reduced by R25.1-billion, while investment is expected to be R3.8-billion lower a year.
Government tax income would be reduced by R16.2-billion and the results show a loss in employment of 29 000 jobs in the coal mining industry, and almost 162 000 jobs in the economy with almost one-million dependants affected. The rising costs of energy due to renewables would reduce general economic growth and negatively impact other commodities and could reduce employment increases even further.
South Africa’s coal reserves are estimated at around 53-billion tons. Nominal sales from coal mining was an estimated R110.6-billion in 2016, an increase of 314% from 2003. This could fall back to approximately R60-billion.
Coal mining accounted for 26.7% of the total value of mining production in 2015, making it the most valuable in terms of sales of the 14 main mining commodities tracked by Statistics South Africa. Among other key requirements, mining, manufacturing and industry need security of supply of electricity at competitive prices. The only two electricity generation sources of energy that can achieve these objectives in this country are ‘clean’ or HELE coal and nuclear. The discounted value of coal reserves is more than R1-trillion. The value of uranium reserves is probably equal to this.The drive for wind would deprive South African citizens of these benefits.
Should incorrect political and economic policies be followed, the above figures could be far worse. South Africa could move into a full medium-term recession. This would result in political and economic instability with dramatically rising levels of unemployment and poverty.
A STEADY AND STABLE COAL MINING INDUSTRY
It is to be hoped that policy-makers do not make the former decision. The country, in practice, should over the next 35 years replace and upgrade its coal fleet. Wind should be virtually abandoned, except for special situations, and about 38 000 MW of new HELE coal power stations should be built. As set out in the IRP2016, nuclear would constitute about 20 000 MW and the balance would be solar, gas and the other power generation sources. Coal would constitute only 40% of the electricity generation fleet compared with the current 90%.
Overseas German windfarm experts, even though they have been to this country, together with their local idealistic support and vested financial interests, do not seem to realise that South Africa is an emerging and still industrialising country with high unemployment. Indeed, recently it has been deindustrialising and needs to reindustrialise again. Renewables will never be able to drive or support this process.
In addition, large-scale wind farms are one of the most environmentally damaging renewable energy source. A factor not considered by green idealists or wind farm supporters.
The local goods producing industry, namely mining, manufacturing, agroprocessing and agriculture are critical for future growth, lowering unemployment and ensuring exports and import replacement to support the current account of the balance of payments.
The IRP base case foresees only 2.2% a year electricity growth which means the maximum GDP growth rate will be no more than 2.9% a year. Unemployment and poverty will therefore continue to rise. As far as the coal industry is concerned, at least there could be a constant or even slightly increasing demand for coal for power stations.
Other demand growth, although small, in comparison should see moderate growth.
Export demand would continue to increase at a low pace but it would be into a highly competitive market.
The industry would be vital for the future development and growth of the country. It would provide a stable environment where both junior minors and traditional mining sources could continue to earn a return.
The above growth path assumes that some of the serious policy decisions listed above are somehow overcome.
GROWTH FOR THE COUNTRY AND THE COAL MINING INDUSTRY
This alternative scenario assumes that the country makes all the correct policy decisions to restore confidence and to make this country attractive for investment again, particularly for mining and industry. The results could be startling. GDP growth could be increased to over 4%. This would require growth in electricity supply increasing at 3.2% a year.
Unemployment and poverty would both be reduced. New HELE coal-fired power stations would need to be increased by 53 550 MW. Coal mining would experience domestic demand growth of 1.5% a year and the industry and the country will truly prosper again.
This last scenario is what is required if the country is to exit the unemployment and poverty trap it is in. Unfortunately, this scenario is a long shot but it should not be.
India and the Asean countries are achieving this and are primarily basing their energy source growth on HELE clean coal power stations. They are set to double their coal-fired electricity generation over the next 30 years. South Africa could do it if there was the will and if policy-makers were willing to work with business to achieve it.
Despite wishful thinking the only true means of achieving security of supply of electricity at competitive prices in South Africa for decades to come is via coal and nuclear generated power. A policy decision to embark on large-scale wind is not feasible in any event, as it requires the full back-up of gas. At this stage, sufficient domestic gas deposits have not been found. Viable shale gas deposits have not been proven. Imported gas would create severe economic and balance of payments problems and would be economically unaffordable.
Furthermore, large-scale wind would lead to the destruction of the South African coal industry. The detrimental economic impact of this policy decision cannot be easily contemplated. These are two policy decisions which will be economically catastrophic for the country.
The purpose of this article is not to spread gloom and doom. It is to make quite clear the stark choices the country faces. The mining industry and coal industry need to fight for their very future otherwise all is lost. In fact, all businesses need to look at the facts, as these future policies will affect the entire economy for a generation.