The current state of the South African coal market will have a positive impact on mining and metals major Exxaro’s Grootegeluk Medupi Expansion Project (GMEP) once the project is complete, says Pretoria-based coal consultancy XMP Consulting senior analyst Xavier Prévost.

He explains that the current state of the industry – characterised by an increase in the price of and demand for coal inland – paired with the possibility that South African coal mines will no longer produce Eskom-bound coal, as well as an increase in coal demand, means that any produced thermal coal will be acquired for power generation. Prévost further points out that Grootegeluk could benefit from this by selling coal at improved prices.

As South Africa needs more coal for power generation, the GMEP, in Lephalale, in the Limpopo province, “comes at the right time for the right reasons”, Prévost tells Mining Weekly, adding that, owing to the latest inland coal prices, better qualities of coal obtain better inland market prices than current export prices.

Moreover, Grootegeluk could expand and increase production, with increased prices also opening the possibility of railing the coal produced to power stations in the Central basin, in Mpumalanga, when other mines no longer have the required resources to support the demand from the power stations. Further, other mining companies could have the opportunity to mine coal in the Waterberg, Prévost suggests.

These prices enable mines to cut overall costs significantly, such as coal washing and transport costs, and simplify coal sales, instead of being limited by contractual agreements or the need to transport the coal to the Richards Bay Coal Terminal, in KwaZulu-Natal, he adds.

Coal in South Africa accounts for the second largest mining income-earning commodity – beating gold – while 95% of South Africa’s energy production requires coal, he notes, adding that, in 2013, South Africa’s local coal use totalled 25.9-million tonnes, while exports accounted for about 78.7-million tonnes.

Cutting the ‘Coal Glut’
Prévost explains that, in light of the current oversupply of coal on the international market and resultant decreasing export prices, coal major Glencore plans to close its Australian mines for three weeks to help erode the global supply glut that pushed prices to multiyear lows, with prices steadily declining since 2011 as production increased.

Similarly, Russian coal miner Kuzbassrazrezugol will cut its production by 2.3-million tonnes in 2015, owing to unfavourable international market conditions, Prévost says, citing a November media release. The miner produced 30.8-million tonnes of coal for export in 2014 from its mines in Siberia.

However, Prévost believes this will positively impact on the South African market in the long term, citing increasing coal prices in mid-November as an encouraging sign, and he notes that the local market is currently selling coal at between $66/t and $67/t for December 2014 and January 2015 shipments.

“Although this is a small price increase, the significant tonnages sold could improve the profits of the mining companies,” he concludes.