Weekly Coal Index heralds vital new era of African pricing transparency
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JOHANNESBURG (miningweekly.com) – Coal remains the dominant primary energy source for the production of electricity in South Africa.
Even with high allocations for renewable energy in the latest Integrated Resource Plan (IRP) 2019, as well as the prospect of coal-plant decommissioning over the coming ten years, coal is still expected to contribute 59% of South Africa’s energy volumes by 2030.
The Weekly Coal Index Report, published in Mining Weekly by African Source Markets, provides weekly commodity indices for standardised grades of coal, together with a brief market commentary, historical pricing and prevailing forward curve.
African Source Markets is providing a transparent platform for all parties to transact domestic coal at a fair market price and is ready to enable trading on the platform, which also allows for copper and other strategic African metals and minerals to be featured.
Against the background of this index heralding a vital new era of important pricing transparency for well-endowed Africa’s minerals and metals, Mining Weekly put these questions to African Source Markets CEO Bevan Jones:
Earlier this year, your African Source Markets launched the online coal trading platform for African buyers and sellers of coal. How has it gone so far?
We’re quite pleased with the response so far, albeit that Covid-19 has slowed things down a bit. We currently have a couple of coal consumers and traders registered, as well as several producers. We are ready to enable trading on the platform, starting with coal but it also allows for copper and other strategic African metals and minerals.
What drives the need for such a platform?
A couple of factors…
The mining sector is undergoing rapid transformation and ownership changes. We offer a trusted, central marketplace with bona-fide market players, no time-wasting middle-men. That is very appealing to serious players.
Of course, these same players can all continue to deal direct, or via agents, not knowing whether they are getting the best price, but I think it’s vital that the industry develops transparency, which helps everyone to know what the fairest spot and forward prices are.
Instead of relying on net-back prices from the export market, our platform allows everyone to transact on inland prices e.g. free on truck or rail direct from the mine. This also creates a fair and level playing field for emerging miners, that may not have the balance sheet for long-term rail contracts or export access via Richards Bay Coal Terminal etc.
In African Source Markets’ Weekly Coal Index Report, published online every week by Mining Weekly, you provide spot market prices for seven categories of coal. Tell us about the importance of transparency around these prices and why these particular coal categories are highlighted?
We report on five specific coal grades that we believe would make good indices i.e. you need to always refer to a standardised grade e.g. Brent, WTI or RB1 etc., to quote reliable price indices. Our chosen coal grades (in MJ/kg on a GAD basis) are 27.50 (equivalent to RB1 or 6,000 kcal/kg NAR), 25.50 (equivalent to RB3 or 5,500 kcal/kg NAR), 24.00, 22.50 and 21.00. These lower grades are also exported but are clearly of most interest to Eskom.
African Source Markets also graphically and colourfully illustrates historical pricing, going back two years at six monthly intervals for the same seven coal categories. What is the benefit of looking back in this way?
Simply that this is a historical price chart. We don’t claim any special benefit in the way we illustrate it.
Projected from the same graph are forward curves that indicate price paths across five years. On what are those price projections based?
Our spot indices are derived from a combination of weekly export net-back pricing, modified by feedback from our members. The forward curves for a couple of these grades are taken from the international coal markets which publish daily forward curves. We also apply the forward curve for USD:ZAR on our curves. It is important to note that the forward curve is simply the overall market’s view of where future prices will be trading at. The forward curve is very often wrong and tends to be quite conservative. The shape of the forward curve is said to be in contango (forward prices higher than spot prices), or in backwardation (forward prices lower than spot prices).
The market commentary is a highlight and provides significant insight. Could you expand on your very interesting comment that a potential finance option available to Eskom is the raising of ‘green’ funding?
This was picked up from a comment in an interview between Chris Yelland and Andre de Ruyter. It speaks to the fact that funding for coal is very difficult going forward but funding for green projects, or for so called clean coal, might be more palatable. Eskom might even face pressure from its bondholders in the future to “go green” and to retire coal plant more quickly than hoped for. There was a recent tender out to investigate repurposing some of Eskom’s older plants, which makes sense, as these are already grid tied with useable turbines etc. With coal as our baseload and renewables more intermittent, I think that all options are on the table. There is lots that can be done. To me, the most obvious is using PV solar to pump water up from a coal mine during the day, and then generating power at night using hydropower by dropping the water under gravity down the mine shaft. Alternatively, look into combining the old Roman Trompe concept with a Tesla Turbine. Gravity and the sun are our best, most Nature-friendly and free sources of energy. Open cut coal mines can also be rehabilitated to pine forest for biomass for co-firing with coal. Energy storage is also key and South Africa should really be leading the way towards a clean hydrogen economy, with our platinum fuel cells. Carbon, especially activated carbon, also makes for excellent electrochemical hydrogen storage at atmospheric pressure.
How would you describe the present state of the domestic coal market?
In a word, tough. But not unexpected. The SA coal market is suffering, and will continue to suffer from demand destruction. From Eskom, from India and Pakistan (our largest export markets), as well as from our small industrial buyers such as cement, paper and sugar mills. Mining costs will continue to rise and we are unlikely to ever see export prices over $100 FOB RBCT again. It all depends on whether coal supply falls faster than demand or not, although the problem for SA is that there’s so much coal out there in global markets. The weak rand may continue to keep our miners in the export game but that is not a good strategy to rely on, plus a weak rand usually means the economy is not doing very well.
Have the volume and price slumps experienced during the Covid-19 pandemic brought to the fore any vulnerabilities for South Africa and its coal exporters?
Yes, due to shifting market demand patterns, our main export market is now almost entirely the Pacific Basin. Mainly India and Pakistan, with some into North Africa and also other Asian buyers such as South Korea, Vietnam, Japan etc. But everyone is chasing these buyers. Plus, India and China are the world’s largest coal producers themselves. If India finally gets their act together and is able to supplant our coal exports with their own domestically mined coal then that is a knockout blow for us. Eskom will be awash with coal.
What should coal exporters be doing to mitigate these vulnerabilities?
First and foremost, money in is better than money out. So if you’re not making it, you better not be spending it. Cut your cloth accordingly. Get brutally efficient and make sure you can be the last man standing at the lowest cost. Then also look to diversify. Investigate hydrogen. Investigate underground coal gasification. Look at partnering now with renewables projects to preserve mining jobs in Mpumalanga. Be part of the Just Transition even as you continue with coal. See the potential of environmental rehabilitation after mine closure as an opportunity, not just a chore. Consider some of the amazing work that the Banks Group has done to create tourist spots, forests, wetlands etc. when rehabilitating their surface mines.
How could Eskom position itself to benefit from this risk to coal exports?
Clearly, as market prices fall, everyone turns to Eskom for a better deal. Miners benefit even more when selling to Eskom because their yields generally go up as well i.e. they don’t need to wash their coal as much as they do for export markets. That doesn’t mean they give Eskom rocks, of course. However, Eskom will only benefit when they are in a position to procure at least some of their coal on a spot basis i.e. when prices are really cheap, or lock in term coal on the forward curve for say, two to three years out. This is another major reason why we started African Source Markets, to offer a transparent platform for all parties to transact a fair market price at the time. If the bottom really does drop out of the export coal market, then Eskom (i.e. the South African public) will effectively be subsidising coal miners with their long-term cost-plus coal agreements. But this is the price we pay for a stable power grid at the moment, since renewables cannot replace the grid overnight. I would suggest the general Pareto principle split e.g. 80% on long- and medium-term cost-plus contracts, with the balance of 20% being market purchases out to two to three years. Either index-linked (floating price) or fixed price. Most power utilities in more evolved, deregulated markets procure their coal on an index linked basis e.g. RB1+$1 for 10m tonnes over 2020-2025. This works for all parties who then employ their financial trading team (or corporate treasury dept.) to manage their price risk separately, whilst their physical coal is secured.
Should Transnet continue to plan to expand the coal export channel, or should it be shifting focus to the development of domestic corridors?
The politically correct answer is that Transnet should support a ramp up to match RBCT’s stated 91 Mtpa capacity. Unfortunately I don’t think that will happen and one must question if the market demand is there for it. Developing domestic corridors is an excellent way to stimulate our domestic economy. We need to get clever about getting our bulk raw materials to our own processing sites near our ports and airports, and then exporting finished goods instead. We should have plenty of energy in the next decade available to us, whether from coal, renewables and/or hydrogen and we need to get “Proudly South African” about making our own stuff, to supply Africa, which is going to become a major demand centre for finished product. There’s no reason why we should not be a major manufacturer such as China is, instead of giving all our valuable minerals away to Asia instead. And if we’re going to sell to China, then at least make sure it’s sold on African Source Markets for a fair and transparent price.
What level of demand will there likely be for coal in the short-term, medium-term and long-term?
In our private research for clients, we analyse the most likely combination of demand destruction vs. producer cutbacks (either mine closures or ‘producer discipline’). Personally, I believe that demand has already fallen significantly, and will find it hard to recover in the next few years. I would hazard a guess that 2018 - 2019 may even have seen peak global coal demand already, although the pattern of demand is shifting dramatically from West to East. Major new coal plants are going up, and expected to go up, in Vietnam and other emerging Asian tigers. Much depends on whether these plants will all get financing and go ahead.
Will supply likely match these demand levels?
In 2020 I think we may also have seen peak global coal supply and going forward, how these two play out now will influence the price, in a range between break-even of around $40 FOB (depending on USD:ZAR) and $80. In five to ten years, I think we start to see significant coal mine closures and supply constraints kicking in, especially as most major mining houses will no longer be in coal then. If demand is also not dramatically reduced by then, coal prices could enjoy an interesting rally.
Will the disposal of coal assets by major stock-market listed companies to non-listed companies be negative, positive or neutral for South Africa’s electricity generation costs and the industrial boiler business offerings?
I’m not sure that Eskom should treat a non-listed company any differently to a major mining house, at least in terms of cost of coal. However, what will impact on coal-fired generation costs is the logistics. The last thing we want to see is thousands of trucks tearing up the roads of Mpumalanga again. That also adds significantly to the delivered cost of coal. Direct conveyor from mine to plant is best, followed by rail, so there is a huge opportunity and role for Transnet to play in centralising logistics here. This is another aspect that we would like to help facilitate on our platform, as certain delivery locations will prove better than others, and liquidity around those can then encourage investment for upgrades etc. The disposals are certainly positive for transformation but clearly the smaller non-listed entities don’t always have access to the type of funding that the major mining houses had. Thus, strategic private partnerships are vital and we can also help originate funding.
Finally, apart from coal, can you please expand on the other commodities for which African Source Markets will reportedly facilitate trading, namely in copper, chrome, diesel, lithium, nickel, biomass and potentially even platinum and hydrogen?
We need to broaden our focus beyond South Africa and realise that many other minerals are exported out of Tanzania, Mozambique etc. But whilst everyone knows the price of three-month London Metal Exchange copper, very few know the price of copper concentrates ex-mine Zambia. Lithium and chrome are strategic for Zimbabwe and for potential exports ex Beira, for instance. There are new tradeable delivery locations that are emerging and we want to be part of that process. Ultimately, once again, we want to increase transparency and improve pricing for both producers and end-users for domestically sourced material, hence our name – African Source Markets. Traders clearly hate transparency but we are fighting in the corner now of the junior miner, who for too long has given away significant upside potential.
African Source Markets CEO Bevan Jones is at firstname.lastname@example.org
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