Eskom’s demands creating a boom for coal producers and problems for local industry users

14th March 2008 By: Fatima Gabru

Power utility Eskom has identified low coal stocks, together with poor coal quality and wet coal as the key culprit of the current energy crisis South Africa is experiencing. South Africa has been hard hit by power cuts that forced mines to shut for five days during late January.

This hunger for coal has led to a rise in the local price of coal, that is hitting other industry users of the energy source hard.

Eskom has confirmed this February, that it plans to conclude contracts over the next two years for the coal it requires to build its emergency stockpiles to ensure that it will have adequate supplies for at least 20 days at its power stations.

“We require 45-million tons for the next two years. Thirty-four-million tons has already been contracted,” Eskom CE Jacob Maroga said.

The utility’s stockpiles had fallen to an average of below ten days, which, together with quality problems, led to significant load losses in January.

This, combined with scheduled summer maintenance and unplanned events, resulted in the unavailability of up to 25% of Eskom’s gener-ation capacity, forcing the utility to resort to an unpopular load-shedding regime.

In looking to build its stockpile, Eskom has turned to South Africa’s leading coal-miners, South African black-owned diversified miner Exxaro, coal-miner Anglo Coal, diversified miners BHP Billiton, Africa Rainbow Mineral (Arm) Coal and Xstrata Coal, besides other coal suppliers.

Global energy consultancy firm Wood MacKenzie coal analyst Xavier Prevost says, “Eskom’s local demand for coal is a catalyst that is creating new mines and increasing production, which will also increase exports and will result in a boom for the coal industry.”

Prevost states that Eskom’s demand is for coal of a different quality than export coal. “This means that building bigger coal stockpiles does not take coal away from exports – on the contrary, it could help to build production of more export-quality coal.

Eskom and the rest of the industry, in general, use the low-quality output of the industry, which is not linked to steam coal prices or availability. This is apart from the niche coal users like the metallurgical industry that uses a different type of coal with different prices.”

Eskom is also likely to be paying far more for the additional coal than what it was currently paying on its contracts, but refused to be drawn on how much more the company was willing to pay. At the time of writing, Eskom was paying an estimated R100/t for its coal, as opposed to the admittedly higher-quality steam coal being exported through Richards Bay, which was trading at about R899/t.

“The impact of the Eskom’s coal procurement plans is enormous. If they pay the prices quoted in the press; it will be an increase in the range of 50% to 150%; this will represent a general increase of local prices and will draw more coal to Eskom and, therefore, make supplies to other local users, which make up about 8% to 10% of local sales (excluding petrochemicals giant Sasol, that mainly uses its own supplies), almost impossible to get. The so-called industry users are small, as far as tonnages are concerned, but are as essential to the country as the big ones are,” Prevost concludes.

The South African national energy research institute chair of clean-coal technology at the University of the Witwatersrand, Professor Rosemary Falcon, concurs: “Even though local industry users of coal account for only 8% of coal produced, they are enormously important to the industries of the country.

There are 8 000 industrial boilers burning coal, in agriculture, sugar, textile, cement, brick-making and lime, among other industries, and because Eskom is taking everything that is coming out of the mines, these industries are suffering.”

Falcon continues, “These industries are buying whatever they can get, whether it is suitable for their boilers or not. About 90% of the boilers in operation, this figure excludes Eskom, were bought at least three or four decades ago when high-quality coal was available to them.

Then came the export drive and they were given the middlings and now they have to look at even lower quality coal to keep the boilers burning. They now have to use coal that is not really suitable for their boilers.

Further, they are now having to pay much higher prices for this lower-quality coal, which means a production cost that will be realised in the market price of the goods they produce. It is a major problem for all industries.”

Anglo American, at its South African coal division, says that it has offered additional coal to Eskom to meet its requirements over the next two years. “We believe that all coal offered has been included in the 45-million tons number quoted by Eskom,” Anglo’s South Africa-based spokes- person, Pranill Ramchander, told Reuters.

Anglo Coal South Africa said it was also in talks with Eskom over supplies that would extend beyond the two-year period.

BHP Billiton also said it was helping Eskom as much as it could as part of a wider coal task team, but did not expect its exports to be affected. “We are part of the coal task team, and we are helping as much as we can on supply, but we don’t expect exports to be affected,” BHP’s spokes- person, Bronwyn Wilkinson, told Reuters.

Exxaro expects to supply about 13,5-million tons of extra coal to Eskom over the next two years. This will form part of the 45-million extra tons that the utility is ordering to ensure that it will have adequate stockpiles at its power stations.

Exxaro COO Mike Kilbride said in mid-February that the company had fairly rapid access to the necessary reserves – some would effectively be brownfield expansions of existing operations, while others were satellite reserves near operational mines.

Apart from the 3,5-million tons that Arm Coal and Xstrata Coal would supply to the embattled Eskom once the R3,2-billion Goedgevonden joint venture was at full production in 2011, some 20 other prospects would be interrogated to potentially augment that supply, Arm CEO André Wilkens told Mining Weekly in a previous interview.

Arm coal will expand the Goedgevonden coal project that it owns with its partner, Zug-based Xstrata, to production levels greater than the planned 6,7-million tons a year if Eskom needed more of the fuel, a top official said.

Wilkens said that, “If Eskom wants more coal, we can expand the mine and give them more coal. We will deliver anything they want,” he said. “We have not finalised the contract rates [with Eskom], which we want to do closer to the time of delivery, with the intention of trying to get as close to spot prices as possible.”

The key to unlocking this and other coal, though, would hinge on Eskom’s price appetite. The utility had already acknowledged that it would need to pay considerably more for new and additional coal than it did currently under its long-term contracts.

It is understood that some of these contracts enabled Eskom to buy coal at as little as R52/t, while the average price has been increasing at a much higher rate owing to the fact that it is having to buy more coal at spot prices as it runs its plants harder and longer to keep pace with demand.

But given the strong demand for seaborne steam coal, and even for the lower-grade 15 MJ/kg to 22 MJ/kg consumed by Eskom’s plants, the new domestic price is likely to be far higher.

In fact, Arm confirmed that the R150/t to R200/t range being mooted was probably more realistic, given the tight market conditions.

This means much higher prices for local industry users as well.