South Africa will continue to be Africa’s dominant coal producer for the foreseeable future, says international trade credit insurer Coface industry analyst Andries Louw.

However, he notes that, with current international developments and the global economy changing, it is difficult to forecast where the future demand for coal will come from.

While some of the world’s biggest coal consumers are slowly moving away from thermal coal energy and adopting alternative energy sources, countries in Africa are expected to show growth in coal output despite the low coal price.

Louw points out that countries such as Mozambique, Botswana and Zambia are expected to show growth in their coal output.

This is owing to the increased demand for electricity by these countries and attempting to meet India’s coal needs.

“Like most developing countries, potential challenges will include inadequate infrastructure, labour challenges as well as power delivery problems that hamper production,” he states.

South African coal producers, which are responsible for more than 90% of sub-Saharan Africa’s coal production are facing a tough future as import opportunities are decreasing.

He notes that South African producers are affected by governmental restrictions that have been implemented by export destinations such as Japan, the US and China.

Government restrictions in China, South Africa’s biggest export destination, regarding coal containing high levels of sulphur and ash had a drastic effect on South African suppliers. China’s demand for the country’s coal showed a significant decrease from 10% of coal imports in 2013 to only 2.5% in 2014. This dealt a major blow to the coal industry in South Africa, adds Louw

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“China’s downturn in imports is owing to a lower domestic coal price resulting from decreasing local demand as well as overproduction from local mines. Slowed economic growth and the oversupply of locally produced coal came about as a result of improved infrastructure as well as cheaper, more efficient production in China,” he explains.

Indonesia, leading coal exporters since 2011, has also been affected by the policy changes in China. The Asian country exports 71.7-million tons more coal than the world’s second-largest producer, Australia. However, the decline in Chinese coal imports has led Louw to believe that Australia may overtake Indonesia to become the leading global coal producer in the near future.

Political powerhouses, such as the US, have also recorded a decline in coal consumption, owing to the rise in environmental government policies, renewable-energy options and natural gas forming a larger portion of the country’s energy composition.

“Predictions seem to indicate that a decrease in US coal consumption is inevitable. It is predicted that coal power will contribute about 35% of the US’s power generation before the end of the decade,” Louw emphasises.

It is predicted that India will soon overtake America as the second-largest coal consumer globally. India is showing growth in coal use with 98-million tons of coal equivalent being consumed between 2012 and 2014. Louw predicts that the growth in Indian coal consumption will be driven by the government’s plans to expand the country’s manufacturing sector.

“Coal will have a vital role to play in meeting energy demands in their economy. Although India intends to make use of renewable-energy projects where possible, coal energy generation will account for around 65% of the energy split in the coming years and, essentially, provide electricity to the masses.”

An attempt to curb air pollution in Europe will also contribute to the gradual decrease of coal as a commodity by developed countries. Louw states that developing countries, such as India, on the other hand, will continue to make use of coal as an energy source as a cheaper energy option with policies supporting growth rather than clean energy.

“There is continued pressure on governments to reduce air pollution globally. Subsequently, in Europe, it is expected that the demand for coal will steadily decrease at a rate slightly higher than 1% yearly during the next five years,” he states.

Despite the possible growth in coal demands from developing countries, Louw sketches a worrying outlook for the South African coal market’s future.

“South Africa’s lower profit margins will continue to put coal producers under pressure, resulting in the closing of unprofitable projects. With wages accounting for nearly half of the total costs in certain South African mining operations, it is clear that South Africa is becoming a less attractive investment option, compared with other African countries with cheaper labour.”