Diversified miner Exxaro Resources expects a mixed picture for demand for its coal products as the Covid-19 pandemic continues to take its toll on the global economy.
In an interim pre-close update by FD Riaan Koppeschaar on June 25, the group pointed out that it had, to date, recorded eight positive Covid-19 cases among employees, one of whom had fully recovered.
The other seven remained active cases.
However, Exxaro had experienced the impact of disruptions to supply chains, demand, international trade flows and travel, along with lockdowns, collapsing currencies and stock prices, resulting from measures related to Covid-19, which had “dealt a heavy blow” to the global economy.
While a deeper recession in 2020 compared with 2008/9, when the global financial crisis struck, is anticipated, commodity markets have recorded mixed results over the six months to June 30.
In respect of Exxaro’s key commodities for the first half of its 2020 financial year, the AP14 coal export price index is expected to average $66/t, free-on-board and the iron-ore fines price to average $90 a dry metric tonne, cost and freight China.
Total coal production, excluding buy-ins, and sales volumes are both expected to decrease by 1% and 2%, respectively, mainly owing to the impact of the pandemic on market demand and the lockdown measures impacting on Exxaro’s Mpumalanga operations.
While Exxaro expects to achieve higher export volumes, this is offset by lower commercial domestic sales volumes, and the company expects a weaker dollar sales price per tonne will be realised, in line with the weaker AP14 coal export price index, which is somewhat cushioned by a weaker rand:dollar exchange rate.
In terms of the company’s capital allocation programme, Exxaro expects capital expenditure in its coal business for the first half of the year to decrease by 61% compared with the second half of 2019, mainly owing to project delays linked to the pandemic and the timing of equipment replacements.
As at May 31, the group’s net debt was R5.3-billion.
In addition to operational measures implemented by Exxaro to combat the spread of the virus, further downside scenarios have been used to stress test the company’s solvency and liquidity position.
As a result, management and the board of directors believe that the group has sufficient liquidity to withstand an interruption to its operations and will remain a going concern for the foreseeable future.
A detailed account of Exxaro’s business performance and the outlook for the subsequent six months to year-end will be provided when the company announces its financial results on August 13.
During the first half of the 2020 financial year, the global economy recorded the worst downturn since the 1930s, and as a result, global real gross domestic product (GDP) is expected to contract by 6%, compared with growth of 2.6% in 2019.
Aggressive fiscal and monetary stimulus by governments and central banks, respectively, was injected into the global economy to soften the downturn and, in turn, support economic recovery.
Chinese steel production remained strong and, together with continued low iron-ore inventory levels and high steel margins, supported the iron-ore price during the period under review.
Additionally, constrained Brazilian supply, as a result of Covid-19-related disruptions, has kept the global iron-ore market balance very tight, according to Koppeschaar.
The titanium dioxide (TiO2) pigment market fundamentals softened with high supply, most notably from China, and weakened global demand especially during the second quarter of 2020.
Koppeschaar explained that the willingness to spend by a weakened consumer base, and behavioural changes in end markets to which TiO2 is most exposed to, have negatively influenced overall demand levels during the first half of the financial year, during which the Brent crude oil market was characterised by the significant impact of Covid-19 measures, collapsing demand and the Saudi Arabia and Russia price war.
In addition, there was a major milestone in oil market history, as for the first time ever, the US, Russia and Saudi Arabia – the world’s three largest oil producers – cooperated to boost oil prices from historically very low levels.
With regard to coal, which South Africa defined as an essential service in respect of State-owned power producer Eskom, as well as being an exporter, Exxaro’s coal operations continued operating at various capacities, while complying with the Covid-19 lockdown restrictions as implemented by the national government.
However, owing to the impact of Covid-19 and the subsequent lockdown, many industrial customers in the domestic market have either reduced demand or stopped coal offtake during April and May.
In addition, coal exporters produced a sized coal product for the local markets owing to very low export pricing, which Koppeschaar said resulted in an oversupply, negatively impacting domestic prices.
It is estimated that the seaborne market is oversupplied by at least 40-million tonnes.
“We have seen the worst of the lockdowns, with negative impacts on the energy complex. The prices of both oil and gas have dropped to record levels and the API4 index price dropped to historically low levels of $40/t. Markets like Vietnam and Pakistan took advantage during this period of low prices to buy more South African coal while the Indian demand fell below the normal offtake,” Koppeschaar pointed out.
As governments across the world try to revive their economies, Exxaro expects to see a gradual uptick in demand in some markets.
Thermal coal product from the Waterberg is expected to increase by 4% in line with improved production and Eskom offtake, while production at the Mpumalanga commercial mines is expected to be 11% lower, mainly at Exxaro Coal Central (ECC) and Leeuwpan owing to the impact of the pandemic on market demand and the lockdown impacting operations, as well as a ten-day shut at Leeuwpan, Belfast and ECC over the Easter period to mitigate the risk of full stockpiles at Richards Bay Coal Terminal (RBCT) and to preserve cash and costs.
This was partly offset by Belfast ramping up to full production in the first half of the year.
Metallurgical coal production is anticipated to increase by 34% owing to Exxaro’s high value strategy being implemented and enabled by improved value chain visualisation. Coal buy-ins are expected to be 173 000 t higher, mainly to fulfil supply commitments in the first quarter of 2020.
The expected 16% increase in export sales volumes is driven by the availability of export product from Exxaro’s own operations, as markets return to normality, as well as good demand in alternative markets.
Total sales to Eskom are expected to decrease by 8% as the supply agreements at ECC and Leeuwpan are still being negotiated, partly offset by higher offtake from Grootegeluk.
Domestic thermal coal sales are also expected to be 8% lower, mainly owing to the impact of the pandemic on key customers resulting in lower offtake, which is countered by slightly higher offtake by other local customers at Leeuwpan.
At tied mines (Matla), thermal coal production and sales are both expected to decrease by 9%, mainly owing to the impact of the pandemic on operating protocols and difficult geological conditions in Mine 3.
Additionally, a revised capital estimate has been submitted to Eskom to fulfil the full scope of the project, with construction planned to start in the second half of this year.
Although the arbitration process on contractual matters has been finalised in Exxaro’s favour at the Arnot mine, there is continuing action to resolve outstanding payments from Eskom as per the order of the court.
Exxaro has previously communicated Eskom’s calling of a force majeure on coal supply agreements at Matimba and Medupi.
“We have also communicated that the company is of the view that this event does not constitute a force majeure as stipulated in the coal supply agreements and that the company will vigorously defend its position in this matter and take the necessary action. Eskom and Exxaro are still engaging on this matter, with offtake currently in line with contractual volumes,” Koppeschaar explained.
Additionally, the conclusion of the Thabametsi power plant has been impacted by the delay in finalisation of all regulatory approvals, as well as lenders withdrawing their support of financing greenfield coal-fired power stations.
Exxaro has completed all its Thabametsi mine studies and has obtained all the necessary licences and permits to operate the mine but will not proceed further until the independent power producer can achieve financial close.
At Belfast, in Mpumalanga, Exxaro reported that the plant acceptance test was completed on February 24, and the project is now in the close-out phase and will be completed within budget and schedule.
With regard to ferrous metals, Exxaro said that it would provide guidance on Sishen Iron Ore Company’s (SIOC’s) equity-accounted contribution when it has reasonable certainty on its first half financial results.
The effective date of the consolidation of Cennergi's results into the Exxaro group is April 1.
Total generation output for the year to date is marginally below (-1.5%) planned numbers.
Eskom issued a force majeure notice to Cennergi in March 2020 indicating that they may curtail generation from all windfarms. This notice was lifted by Eskom at the end of May.
Cennergi is, however, engaging with Eskom on this notice as they are in disagreement regarding the contractual interpretation.
Curtailment, although not material, occurred at both wind farms during the force majeure period, Koppeschaar said.
ASSETS AND INVESTMENTS
Exxaro is in the final stages of concluding an agreement for the sale of its 26% shareholding in Black Mountain Mining, and it is anticipated that the agreements will be concluded before the end of June.
On November 30, 2019, the investment was classified as a non-current asset held-for-sale and the application of the equity-accounting method ceased.
Exxaro previously announced its intention to divest from ECC and the Leeuwpan operations, and these divestments will be executed through a formal disposal process which is currently well under way.
It is expected that a transaction can be concluded towards the end of the year.
Exxaro expects domestic coal demand to show a gradual recovery amid the slow return of industrial customers to full operations.
However, the company does not expect to claw back on the sales lost during the past few months, but rather anticipates the Matimba power station to continue meeting their contractual offtake volumes for the year from Grootegeluk while Medupi power station will need to increase offtake in an effort to catch up on some volumes not taken in the first half of the year.
In line with Exxaro’s digitalisation programme, the company continues to roll out the Integrated Operations Centres across all its operations to enable the visualisation of the value chain.
“The increased visualisation of the overall value chain as well as data-driven insights gained from our operations, will highlight inefficiencies and will enable improved in-time decision-making relating to safety, productivity improvements as well as cost performance,” Koppeschaar said.
Regarding the Moranbah South coking coal project, Exxaro and Anglo American continue their endeavours to agree on a mutually beneficial development plan and timeline.
For the second half of the year, the restarting of the global economy is anticipated to bring economic growth recovery.
However, the uncertainty about the path of Covid-19 makes any assessment of the global economic outlook challenging, Koppeschaar said, lamenting the “devastating” impact of the pandemic on South Africa’s fragile public finances, with gross government debt as a percentage of GDP likely to rise significantly together with debt service costs.
These fiscal imbalances will have a knock-on effect on the economic recovery path for South Africa into the second half of the year.
During the first half of the year, the rand depreciated to an all-time low in March, before it retracted significantly in June, and Koppeschaar said that the reversion will lead to a riskier environment, as a result of the easing of global Covid-19 lockdown restrictions, which supported the rand.
The rand:dollar exchange rate is expected to remain volatile during the second half of this year.