Coal industry faces export challenges

An agreement between mine, port, and rail authorities in the coal industry needs to be reached in order for the coal industry to focus on the export of high-quality coal, says Barlow Jonker coal industry analyst Xavier Prevost.

Prevost is concerned that South Africa is not exporting enough high-quality, or low-ash, coal to Europe, and that not enough is being done to increase infrastructure capacity to export coal.

He explains that South Africa’s biggest coal income is derived from exports to Europe, where prices are ten times higher than local market prices, owing to lower-quality coal being sold to entities such as State-owned power utility Eskom.

Of the coal that is produced in South African mines, 30% is used for export to Europe, India and other destinations, while the remaining 70% caters for the local market. Eskom and South African petro- chemicals giant Sasol remain the two biggest users of coal in the country.

In 2006, about 88% of South Africa’s high-quality coal was exported to Europe, whereas, in 2007, that number dropped by 5%, to 83%, he explains.

He reiterates that the biggest demand for low-ash coal is from the European market, where prices are profitable, and he adds that the European market relies in the quality and consistency of South African coal.

Further, he says, the high rise in coal prices coincides with a surge in local demand owing to the electricity crisis in the country.

Eskom’s power generation projects have also resulted in a surge in demand, with mines and companies selling coal at higher prices in order to meet the generation demand and increased output of the utility. The overall increase in coal prices comes as a result of Eskom buying beyond its contracts and capacity.
After having decided to streamline its generation processes, Eskom set a goal to attain large stockpiles, amounting to 45-million tons of coal.

Increasing Capacity
Meanwhile, many new mines have been opened in order to provide coal for Eskom’s power stations situated across the country.

Prevost states that mining giant Anglo American will provide about 70-million tons a year to Eskom, while diversified resources group Exxaro will increase its capacity to provide about 50-million tons a year.

But, he states, the erection of new power stations called for new environmental legislation being implemented by the Department of Environmental Affairs and Tourism, which will impose tighter emissions control on power stations in the future to protect the environment.

The legislation states that emissions must be suppressed as much as possible, and that Eskom can either choose to use new clean coal technologies, or to capture emissions using carbon storage reservoirs, he says.

Nevertheless, Prevost explains that since cleaner generation units are used in these power stations, it will be a very expensive process, and will thus cause an increase in electricity prices in the near future.

Although alternative sources of energy, such as natural gas, coal bed methane, and nuclear energy technologies, such as the pebble-bed modular reactor, are being investigated, Prevost believes that coal still remains the cheapest and best method to generate electricity.

He adds that although European countries have already investigated several renewable energy options, many of these countries have reverted back to coal-fired power stations, with controlled emissions, in order to meet electricity demand.

Challenges
Coal-mining programmes have not been without challenges. Mines acquiring licences tend to wait years before they can start operations, which hinders fast production output, and infrastructure capacity concerns, such as railway lines and ports, remain a thorn in the side of the coal sector, says Prevost.

Railways and sea ports are only designed for certain capacities, and are not keeping up with the surging demand of coal exports, he says.

The biggest single coal terminal in the world, the Richards Bay Coal Terminal (RBCT), is undergoing expansion, which will increase its capacity to 91-million tons a year by mid-2009.

However, Prevost states that the RBCT is currently exporting less than 70-million tons a year, which means that it is not even being used to its full present capacity of 76- million tons a year.

Prevost believes that the only solution to the downward export curve is for transport utility Transnet to engage in more constructive discussions not only with the RBCT, but also with mines and port authorities, in order to tackle infrastructure concerns.

He reiterates that coal terminals will not reach capacity unless Transnet increases the capacity of the railway lines, and states that Transnet needs to be convinced that there is enough coal to be exported.

South Africa’s high-quality coal needs to be exported, since it has almost no local market locally, except for the metallurgical industry that could buy only about three- million to six-million tons of low-ash coal a year. Some of this coal will be left behind with no buyers, and this will result in a massive financial loss for coal mines, he concludes.