Diversified mining and energy group Exxaro Resources says high-quality thermal coal remains significantly in demand as the Russia/Ukraine war persists.
The company reported in a pre-close statement issued on June 30 that the first half of the year has seen worsened supply chain disruptions globally and extreme rises in energy costs, owing to China’s lockdown restrictions and the prevailing conflict in Ukraine.
After a strong 2021 finish, global economic growth had slowed in the first quarter of this year and stalled by the second quarter. Global real gross domestic product is likely to only grow by 2.9% this year.
The Russia/Ukraine war and Europe’s quest for alternative suppliers of especially high-quality thermal coal continues to drive the shortages. Extremely high and volatile prices were recorded during the first half of the year.
Seaborne thermal coal prices rebounded upward as several governments firmed plans to sanction Russian energy imports.
The European Union (EU) approved an alternative coal supplier plan, effective after mid-August this year, while Japan announced alternative plans without an effective date.
These geopolitical developments were the single most critical factor that influenced the energy complex markets during the period.
The evolving global economic environment of rising interest rates, slower economic growth, and improving supply conditions are expected to bring some price pressure relief.
International coal prices had reached a record high during the first half of the year, primarily driven by the Russia/Ukraine war.
Exxaro notes that global trade flows were affected, resulting in increased demand from Europe for South African high-quality coal, as alternative supply sources were sought to reduce dependency on Russia.
In stark contrast to the increased demand from Europe, the resultant high coal prices reduced demand from Asia, especially from India and Pakistan owing to affordability factors.
The domestic market has also been impacted by the higher export price, as the improved attractiveness of alternative export distribution channels allows for domestic volumes to be sold in the international market.
The resulting domestic supply tightness has resulted in a higher domestic price outlook, Exxaro stated.
European demand for South Africa’s high calorific value (CV) coal is expected to increase in the second half of the year. This is mainly attributed to the European ban on Russian coal coming into effect in August.
The power crisis in India is also expected to contribute to higher demand as the government has now mandated all importing coal-based plants to resume full operations.
Market volatility is expected to persist for the remainder of the year as Russian suppliers seek alternative markets to place product.
“We expect pricing to remain strong, given the overall higher pricing of the energy complex.
“Domestic demand for high CV and power station coal is expected to remain strong should the current export price levels persist into the second half of the year, as market participants continue to truck coal to alternative ports owing to the favourable pricing environment,” Exxaro noted.
The group expects to report 20.5-million tonnes of thermal coal production for the first half of the year, compared with the 20.3-million tonnes of coal produced in the second half last year.
The API4 coal export price index looks like it will average $270/t for the first half of the year, compared with an average coal export price of $151/t recorded in the second half of last year.
Meanwhile, Exxaro’s energy business, Cenergi Holdings, successfully registered its 80 MW Lephalale solar project with the National Energy Regulator of South Africa during the period, marking the first phase of decarbonisation for Exxaro’s flagship Grootgeluk mine, in Limpopo.
Exxaro expects its capital expenditure for the first half of the year in its coal business to be about 47% lower, mainly owing to key projects reaching completion, as well as the disposal of Exxaro Coal Central operations as of September 3, 2021.
The group says it has sufficient liquidity with net cash of R5.9-billion on hand.
Poor rail performance continues to put a strain on mining value chains and Exxaro’s ability to produce at optimal levels.
For example, the performance from Grootegeluk has declined from an average of five trains a week in 2021 to four trains a week in the year-to-date. In Mpumalanga, Exxaro’s overall export rail performance declined from 15 trains a week in 2021 to eight trains a week in the year-to-date.
The rail performance is being hampered by poor locomotive availability, derailments and instances of cable theft and vandalism.
Exxaro continues to engage with industry and Transnet Freight Rail to improve operational rail performance, and it is exploring various logistics initiatives to mitigate this constraint.
Exxaro will publish its interim results on or about August 18.