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Stringent regulations may impede coal industry growth

RUBEN NIZARD The environmental regulations worldwide could have an impact on coal exports

RUBEN NIZARD The environmental regulations worldwide could have an impact on coal exports

16th March 2018

By: Donald Makhafola

Creamer Media Reporter

     

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While key challenges facing the coal mining industry make the future of coal in South Africa uncertain, when considering the weight of coal in South Africa’s energy mix, the coal mining industry is likely to remain an important one, says credit insurer Coface group economist Ruben Nizard.

South Africa is the seventh largest producer and consumer of coal worldwide and is estimated to have the tenth largest proven reserve, according to the US Energy Information Administration.

Nizard, however, points out that a slow decline of energy generated from coal-fired plants could translate into sluggish growth for the sector, while demand from South Africa’s main export market is also a key risk that could undermine the role of the sector in the South African economy.

Industry Impediments
According to Nizard, key challenges for the South African coal mining industry include uncertain/more stringent policies and regulations, environmental requirements, waning investment in the sector, inadequate infrastructure – mostly water and rail infrastructures – and land access.

In his presentation of the 2018/19 Budget, then Finance Minister Malusi Gigaba confirmed that carbon tax will be implemented from January 1, 2019, and this is likely to impact on the cost of coal production, which could undermine the competitiveness of South African coal, says Nizard.

Nizard adds that the implementation of the South African Renewable Energy Independent Power Producer Procurement Programme signals that the country is on a path to reduce its share of fossil fuels in the domestic energy market.

He says State-owned power utility Eskom has already announced the phasing out of four old coal mines in the next five years. While coal demand from South Africa’s main export destination (India) is expected to keep growing in the short-term, demand growth might slow as well.

Nizard believes the environmental regulations worldwide could also have an impact on coal exports, as shown by the drastic decline of the share of exports to Europe in the past 15 years.

“Europe used to be South Africa’s traditional export market, but, over the past 10 to 15 years it has shifted to Asia. In 2016, Asia received two-thirds of South Africa’s total coal shipment, with the largest destination being India, which absorbs nearly half of South Africa’s coal exports.”

Nizard says that, in addition to environmental policies, coal producers also face regulatory uncertainties in the mining sector, such as in the provisions of the Mineral and Petroleum Resources Development Amendment Bill 2013, which represents the most significant and far reaching changes to the Mineral and Petroleum Resources Development Act, of 2002.

But he remains confident that newly elected South African President Cyril Ramaphosa’s commitment to clear policy and regulatory certainty, the lack of which has plagued the mining industry in general, could unlock some much-needed investment in the short term.

“His intervention to open talks on the controversial Mining Charter III is a first step towards restoring confidence. Should the reforms in the mining industry be prioritised promptly, a slow and steady return of investment growth is possible in mining and coal,” he enthuses.

Nizard further believes that railway bottlenecks are one of the largest impediments for the coal mining sector, with insufficient rail capacities linking inland coal fields to ports being one of the main constraints for expanding exports.

“The Transnet line to Richards Bay Coal Terminal – South Africa’s main export terminal for coal – sent about 76-million-tonnes to the harbour’s installed capacity of 91-million-tonnes last year.”

He indicates that, while State-owned freight rail company Transnet has plans to increase the capacity on its coal line, this will take several years.

Clean Coal Changes
With more stringent environmental requirements likely to accumulate as a result of South Africa’s commitment to reduce greenhouse-gas (GHG) emissions under the Paris Agreement, Nizard notes that the coal mining industry mostly relies on new technologies to reduce its impact on the environment.

“In addition to carbon capture and storage [the process of capturing waste carbon dioxide from large point sources, such as fossil fuel power plants, transporting it to a storage site, and depositing it where it will not enter the atmosphere, normally an underground geological formation], the industry has mentioned its willingness to develop technological solutions, such as underground coal gasification and high efficiency, low emissions plants, which will result in a reduction in carbon emissions.”

He further indicates that the industry relies on environmental management plans that require coal mining companies to conduct regular audits to verify compliance with existing regulations. “It has also adopted ‘water management principles’ to use water more appropriately and pollute water less.”

Nizard says “clean coal” technologies could potentially enable coal-fired power plants, which provide most of South African electricity, to emit less GHGs.

He states that the coal mining industry has also not been immune to the general challenges faced by the manufacturing industry, such as rising costs, technical difficulties, policy uncertainty, lack of investment, ageing infrastructure, low prices and water shortages.

“Throughout its entire value chain, coal production requires extensive volumes of water. Hence, water scarcity could be one of the main issues for the South African coal industry, as coal can pollute water resources, making the issue of water scarcity more acute,” he concludes.

Edited by Mia Breytenbach
Creamer Media Deputy Editor: Features

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