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State enterprises can make or break South Africa’s vital coal mining business

13th March 2015

By: Martin Creamer

Creamer Media Editor

  

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Two major State-owned enterprises play such pivotal roles in South Africa’s vital coal mining business that they have the power to make or break the industry that supplies the fuel to keep the country in the twenty-first century.

The supply of coal to State power utility Eskom determines whether it succeeds or fails and the supply of coal on schedule to State rail enterprise Transnet Freight Rail (TFR) on the coal line determines whether its latest investments can be viably amortised.

Major South African coal mining companies, Eskom and TFR are thus inextricably linked, against the background of South Africa relying on coal for 90% of its power and on TFR for the export of coal, which is also one of this country’s biggest foreign exchange earners.

With Eskom and Transnet falling under the same Department of Public Enterprises, there should be every chance that the supply can be kept in mutually beneficial balance.

But, in the light of its experience in Australia, Glencore this week shone a spotlight on this all-important interplay with this comment to Mining Weekly during a global conference call, when Glencore CEO Ivan Glasenberg had this to say in response to a Mining Weekly question on the steps that TFR is taking to secure take-or-pay agreements with coal mining companies that require their coal to be railed to ports for export: “I think this is a thing both government and ourselves have got to worry about. We don’t want to be in a situation like Australia, where suddenly you sign these take-or-pays and you have a better outlet for the coal on the local market, but you can’t supply the local market because you’re paying a $15/t penalty on your take-or-pay.”

In terms of take-or-pay contracts, coal mining companies are penalised should they not have coal for loading onto trains when they arrive to collect the coal.

Unconfirmed reports reaching South Africa are that there have been instances of domestic power stations in Australia running short of coal because of the need of coal mining companies to honour take-or-pay agreements with rail companies.

As an unintended consequence, some of these power stations in Australia have ended up having to pay export parity prices for coal and also footing the bill for penalties imposed on companies that have diverted their coal into the domestic market to meet domestic power needs.

The fear is that if South African companies become overexposed to take-or-pay agreements with TFR in the same way as some Australian companies have, coal might end up in the export market and not the domestic market simply to avoid penalties.

At the same time, TFR, which is investing heavily in new locomotives, admirably, without any help from the fiscus and without government guarantees, has risen extremely well to the rail challenge and deserves a degree of certainty.

But this should not be at the expense of power generation, which is the lifeblood of the South African economy and which has already risen in price to what are regarded as uncompetitive heights.

The Ministries of Public Enterprises and Mineral Resources as well as mining companies need to arrive at a balance that is best for South Africa Inc.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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