SA coal exports to rise in ’09, but rail will determine by how much

27th March 2009 By: Jonathan Faurie

South Africa has an expanding coal-export terminal, but an uncertain rail capacity.

The mismatch is something South Africa cannot afford, given its current-account deficit and the need to export optimally.

Last year, South Africa’s coal exports were way below port capacity, reflecting a lost export opportunity.

While coal exports are expected to rise this year, if an increase eventuates, rail will determine its extent.

South Africa burns its low-grade coal to generate electricity and exports its high-grade coal very lucratively.

South Africa’s State-owned electricity utility, Eskom, wants more coal to feed its growing power-station demand, and coal miners want the dripping-roast export prices to bolster their business plans.

The two markets go hand in hand and have resulted in South African coal companies being able to keep power costs down and revenue rising from coal exports.

Problematic is Transnet Freight Rail’s (TFR’s) demand for long-term commitment from coal companies and on the horizon are possible public–private partnerships (IPPs) between coal-miners and TFR, just as Eskom is rolling out IPPs to ensure adequate power going into the future.

Besides gold, coal has been a significant contributor to the South African economy –but it could contribute much more with full alignment between all parties.

Wood Mackenzie senior coal analyst Xavier Prevost reports that this is a very exciting period for the South African coal industry. The need for more steam coal for domestic power generation projects has increased inland consumption. A moderate demand from increased exports coupled with the Richards Bay Coal Terminal (RBCT) expansion projects will increase exports.

He adds that exports are becoming a high priority on the agenda of most South African coal companies. “For many new economic empowered miners, this is a lifeline,” says Prevost.

In light of the increased demand for coal, Prevost reports that nine new coal projects were commissioned in 2007, with a further 11 being commissioned in 2008.

He notes that the smaller companies are using smaller reserve blocks not previously used by larger mining companies.

Prevost expects that, owing to decreased demand and high shipping costs, exports to Europe will drop; however, the Asian market will make up for the shortfall created by Europe.

The Asian market, once neglected, is now once more opening up to South African coals. This is being driven by increased energy needs in the region.

However, coal exporters are being constrained and are not able to take full advantage of the demand for South African coal from international markets.

South Africa is home to the biggest coal export terminal in the world in the RBCT, in KwaZulu-Natal. Current throughput capacity is 76-million tons a year. The port is currently going through an upgrade, which is expected to be complete in July, and which will increase the capacity of the terminal to 91-million tons a year, with reports of further expansion to 100-million tons a year in the near future.

Although the terminal currently has the capacity to export 76-million tons of coal a year, South African producers were only able to export 61,79-million tons.

This is 6,6% down on 2007 export figures. Mining Weekly recently reported that RBCT COO Raymond Chirwa said that the terminal’s exports are based on a sustainable supply of coal. He noted that the terminal had exported all the coal received, as well as some of the coal from its stockpile, which stood at 2,3-billion tons at the end of December 2008.

STEADY PRODUCTION


The drop in exports cannot be attributed to a drop in production.

Reports from one of South Africa’s biggest coal producers, Anglo Coal, part of the Anglo American mining group, indicate that coal operating profits contributed $2,240-million to the company’s overall operating profits. This is a 265% increase on profits generated in 2007.

The increase is mainly owing to higher prices for thermal and metallurgical export coal, higher production and tighter operational disciplines.

In addition, the company approved three new South African projects last year, namely Mafube, Mac West and Zondagsfontein, which are set to add a further 14,7-million tons to Anglo Coal’s production every year. Anglo Coal has also indicated that 6,6-million tons a year from Zondagsfontein will be allocated for export.

Looking to the future, Anglo Coal’s production is set to increase significantly between 2010 and 2013 when the company approves a further five South African projects, which will add an estimated 1 650,9-million tons to production each year.

South Africa’s other coal-mining major, Exxaro Resources, reports that total production for 2008 was 44,8-million tons, which is an increase of 3,5-million tons on 2007 coal production.

Of the 44,8-million tons mined in 2008, 36,7-million tons was set aside for Eskom while 8,1-million tons was set aside for the export market.

RAIL INEFFICIENCIES

This drop in exports is not owing to a drop in demand as a result of the global financial crisis, nor is it owing to the fact that South African coal-mining companies are producing less coal. Prevost reports that the drop in exports is owing to lagging transport infrastructure, specifically rail infrastructure, from the mines to the RBCT.

Starting at Mpumalanga’s 44 coal-rich mines, the 580-km line descends from the Highveld through rural KwaZulu-Natal and stops at Richards Bay. The double line is bidirectionally signalled and fully electrified. Two 100-wagon trains are coupled to form one 200-wagon train at Ermelo, in Mpumalanga, typically using CCL-type wagons. These trains stretch 2,5 km and are loaded to 20 800 gross tons.

TFR also transports coal and related products domestically and for exports through Durban and Maputo.

“South African coal exports are being constrained by TFR’s ailing rail infrastructure which can’t get sufficient coal to Richards Bay and Maputo, home to two of Southern Africa’s largest coal export terminals. The RBCT problem is a long-term problem with no indication of change on the horizon,” says Prevost.

He adds that, although production has increased, and the RBCT has indicated that it will significantly increase capacity over the next two years, TRF is not willing to invest in rolling stock, stating that the export tonnage to support exports beyond current levels does not exist.

“This creates a stalemate as new coal mine projects require extra rail capacity to produce the extra export tonnage the coal terminals need for the future,” says Prevost.

TFR coal export line manager Bertie Maree acknowledges that there are shortfalls on the coal line; however, the company is implementing a strategy to resolve this.

In November 2008, Maree told Mining Weekly that the shortfall in transportation in 2008 was owing to high rainfall in the country at the beginning of the year, which meant that miners could not supply the coal, as well as handling and infrastructure-related derailments along the coal line.

Disruptions because of the RBCT expansion were also a factor.

In 2008, TFR was implementing its turn-around strategy, which would see the rail company spending some R12-billion on capital expenditure (capex), of which about R7,2-billion had already been spent.

More than 1 000 new wagons are to be built under the new capex programme to accommodate increased tonnages. The first 300 will go into service this month.

New locomotives would also be procured, signalling systems improved and formation, specifically the ground beneath the tracks, like a foundation, reinforced.

LOCAL DISTRACTION

Another factor that could play a role in decreasing coal exports is State-owned power utility Eskom’s growing need for coal and the utility’s corporate coal specialist, Johan Dempers, reckons that South Africa needs 40 more coal mines at an investment of R100-billion over the next 20 years.

At the beginning of 2008, South Africa was hit by an energy crisis that affected many local businesses.

A large portion of the blame was put on Eskom and its inability to effectively supply electricity throughout the country.

Eskom has a vigorous capacity build programme, which will see some old stations returned to service and new coal-fired power stations being built around the country.

Two of the biggest power stations under construction are Medupi and Kusile, both being built in the coal-rich, but depleting, province of Mpumalanga. Prevost indicates that when the two power stations go on line, between 2013 and 2017, there will be a dramatic increase in domestic demand for coal that miners will find hard to ignore.

If one looks at the local demand for coal against the demand for export, the local demand during 2008 was 189-million tons and is expected to increase by four-million tons during 2009.

However, there will be a vast increase in local demand between 2011, when the first unit of Medupi is expected to go on line, and 2017, when the power station is expected to ramp up to full production.

Prevost reports that local coal consumption in 2011 is expected to be 203-million tons. This is expected to steadily increase year- on-year with 2017 demand estimated at 244-million tons.

A number of coal-mining companies have already stated their intentions with regard to local coal supply. Black empowered coal-miner African Rainbow Minerals (Arm) Coal reports that the company is currently exporting about 42% of its coal to China, while South African sales make up a low 1% of the company’s sales.

However, this is set to change. Noting that Eskom’s capacity build programme presents mining companies with a unique situation to capitalise on increased local demand for coal, Arm executive director Stompie Shiels reports that the company has initiated negotiations with Eskom with a view to increasing sales of thermal coal to the State-owned power utility.

He adds that once the Goedgevonden project is fully operational in 2011, it is expected to produce 6,7-million tons of coal a year, of which 3,1-million tons a year will be exported. The remaining 3,6-million tons a year will be supplied to the domestic thermal market, where Eskom is the biggest consumer.

He expects a slight increase in coal exports in 2009, which will steadily increase to 2020.

UNIQUE SITUATION

Owing to the current capacity build programme being rolled out by Eskom, and the increased demand for coal from previously neglected markets, such as Asia, the South African coal industry is set to grow into one of the country’s most vibrant mining sectors. Although exports to Europe have decreased, the demand from Asia will keep coal exports buoyant.

The RBCT and coal-mining companies indicate that they are well positioned to take advantage of this situation. However, rail efficiencies from TFR will largely dictate whether South African coal exports will increase and by how much.