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South African coal industry needs to pursue mechanisation

USURPER Mozambique's coal prospects are attracting significant foreign investment and its coal sector may outstrip South Africa's in the near future

TECHNOLOGICAL REVOLUTION With the advent of mechanised mining and cleaner coal technologies, there is a lot of technological innovation related to the coal sector

16th September 2016

By: Nadine James

Features Deputy Editor

  

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South African coal industry stakeholders need to pursue mechanisation if the industry is serious about streamlining operations and improving efficiencies, stresses international market research company BMI Research.

BMI commodities analyst Mitchell Hugers states that the benefits of mechanisation, which include increasing efficiencies and reducing operational costs, will, in the long term, outweigh the high start-up costs involved in mechanising a mining operation. Further, owing to pressure from the lacklustre coal market and the import restrictions implemented by China, the local industry cannot afford to ignore any solution that could ultimately enhance operations and increase profit.

Hugers notes that the growth of the South African coal mining sector has been hindered by weak coal prices, divestments, power supply shortages and the Chinese import restrictions, subsequently leaving the country’s coal sector in a precarious position.

The weakness of the coal price – attributed to persisting coal oversupply and slowing Chinese growth – will force mining companies to cut capital expenditure in the short term, he notes. “We forecast that Newcastle coal prices will average $62/t from 2016 to 2020, which is significantly lower than the average of $94.1/t from 2010 to 2014.”

Additionally, diversified miner Anglo American’s restructuring plan – announced in December 2015 – to divest its noncore and lossmaking assets, downsize its workforce and consolidate business divisions, will cause substantial short-term harm to the South African coal mining sector, says Hugers. He believes that some of the assets will likely be acquired by Indian coal companies that are keen to acquire cheap assets to bridge the gap in the Asian country’s domestic demand.

“Anglo’s operations account for nearly 21.5% of the country’s total thermal coal production. Anglo also plans to cut its workforce, with more than 24 500 people employed at its thermal coal operations and a total staff complement in South Africa of 72 000.”

The Chinese government announced restrictions on the imports of coal containing high levels of sulphur and ash in 2014, and the country’s restrictions on coal imports will continue to limit its demand for South African coal. Hugers notes that South Africa’s coal contains high ash levels relative to other major producing countries, including Indonesia and Russia. “The import restrictions resulted in South Africa’s share of China’s total coal imports falling from 10% in 2013 to 2.5% in 2014.”

These factors, coupled with South Africa’s intermittent power supply, have become major hurdles for coal mining operation growth in the medium term. However, the country’s immense coal reserves, estimated at 33-billion short tonnes, mean that BMI remains positive for the sector’s long-term outlook. The company expects that the growth of the industry will be supported by strong domestic demand for coal-fired power generation.

Southern African Coal
While South Africa is currently the largest coal producer in Africa, other Southern African countries also show potential. Hugers notes that Botswana has an estimated 212-billion short tonnes in coal reserves and a conducive policy environment, which could result in its displacing South Africa in the long term as the continent’s top coal producer.

He comments that, in light of its vast coal resources, the Botswana government’s timing leaves much to be desired, as its current efforts to develop a coal sector coincide with multinational mining groups scaling back output and dismal coal prices. Hugers highlights, however, that the country’s interest in the development of the industry is delayed as government was “focused solely on diamond exports as a source of revenue”.

He notes that, since identifying the exploitation of Botswana’s considerable coal reserves as a national objective in 2012, government has sought to provide a supportive environment for overseas coal miners and is working to put in place the necessary infrastructure, such as railway lines to coastal regions, to allow for increased production and exports.

“Botswana aims to become a net electricity exporter by 2018, a development that could further boost the country’s wider mining operations,” Hugers comments, highlighting government’s awarding of a contract in November 2015 to build the 300 MW Morupule coal-fired power station, near the Morupule coal mine, on the outskirts of Palapye, in the east of Botswana.

BMI believes that Botswana’s significant government support and high-grade coal reserves, as well as power producer African Energy’s and mining company Exxaro’s project pipelines, will ensure that the coal sector develops smoothly over the next decade.

Meanwhile, Mozambique’s coal sector is also expected to attract significant investment in the medium term. Currently, there are six projects in development in Mozambique. Of these, four are new thermal coal projects, namely the Changara coal project owned by coal producer Beacon Hill, the Zambeze and the Tete projects owned by Indian coal company International Coal Ventures and power development company Ncondezi’s project. Besides these projects, there is one coking coal project, the Revuboe mine project owned by Mozambique-registered company Minas de Revuboe.

Hugers notes that sub-Saharan Africa’s coal consumption should increase within the next 5 to 15 years because coal is readily available and a cheap alternative to other sources of power generation, especially for countries with limited access to natural gas. Yet, in the long term, BMI expects hydropower and natural gas to increasingly take over power generation market share in the region as the cost of hydropower production and storage decreases and access to gas increases.

While coal’s market share in terms of power generation is expected to decline, Hugers advances that coal will still be a viable commodity in 50 years’ time, noting that it will still be a cheap source of energy in many developing countries, especially India.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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