Coal: not a binary choice
The sleeper commodity of 2021 has been dirty old coal, and the shares that mine it — including Thungela and Exxaro. The FM spoke to Thungela CEO July Ndlovu about the incredible recent spike in coal and energy prices.
Did you think this might happen when you listed, when very few gave Thungela the time of day?
JN: I expected the market to tighten, for two fundamental reasons, one [being] that demand, in particular in the Far
East, would go back to prepandemic levels. But I think the trend we all ignored was the fact that as we deplete mining resources, the ability of the coal industry to respond to demand has been severely dented. Did I expect the prices to spike as much as they did? Maybe not, but what we’re seeing is a perfect storm where there are other factors beyond just the fundamentals.
Do you think it will normalise? Or, if funding for new coal mines is being pulled, that this could continue?
JN: We are now in a zone of uncertainty, and what is uncertain is that the same factors that have created the dislocation [remain]. Will it repeat itself like that? I don’t think so, there will be some normalisation, but we are on a trend for a tight supply-demand situation.
How does it affect you if the banks refuse to fund new coal projects, in the name of environmental, social and governance criteria? What do you do?
JN: If there’s demand and that demand is profitable and that demand is secure, you will find funding. It could be very different mechanisms, or it could be funding from your own balance sheet, quite frankly. At these current prices we shouldn’t struggle to fund our own projects, but equally there are creative funding structures that you can put in place; you can go to traders and forward-sell your coal if you have to. I don’t worry too much about our ability to fund projects if they’re competitive. I think the crux of the issue is our conviction about demand. Certainly, over the next decade and a half, we think there’s good demand.
What about after that?
JN: Probably the most authoritative scenarios about long-term projections of fossil fuel demand come out of the IEA [International Energy Agency]. I haven’t seen a single scenario that says there’ll be zero coal by 2050. Therefore, the challenge for us as miners is to make sure you’ve got the most competitive assets. I think what we’re seeing in Europe is the false choice that a transition to future energy systems means getting rid of coal and putting in something new, as opposed to a coal-enabled transition. When the crunch came in the UK, they had to resort back to coal.
If we’re going to mine the metals required to deploy renewables, then you require energy to do that — and that energy still comes from fossil fuels. If that is the transition, then you might as well wake up to the reality that we need to mitigate emissions. To think that we have a binary choice of coal or nothing else is a false choice.
But is it possible to have cleaner coalfired power? Sasol, for one, doesn’t seem to think so.
JN: I can’t speak for my competitors, but cleaner technology is not just carbon capture and sequestration. There are highly efficient low-emission powergeneration technologies that can significantly reduce emissions. If you retrofitted conventional power plants with these technologies today, you’d be able to reduce emissions by the equivalent of what Southeast Asia emitted in 2018 — 2 gigatons of CO². That’s massive, and this is proven technology that exists.
Why is that not a responsible choice? If you read the intergovernmental panel, their own conclusions are that we will not be able to reverse global warming by 2050 unless we are able to make carbon capture, in some shape or form, work. We are going to have to figure out a way to take CO² out of the atmosphere. So we should stop debating things and get on with inventing the technologies that are required to meet our climate change goals.
What do you make of the apparent policy discord in SA between the greens and the coal fans — like Gwede Mantashe?
JN: I think we’re making more of this discord than it actually is. Climate change is real and I don’t think Mantashe denies that. I think where this debate comes in is where people say: “We should only do renewables and get rid of coal today.” It’s not possible. So when Mantashe says “I don’t think you can do this transition as you say”, he’s just being realistic. The facts are that we have 91,000 employees in the sector who depend on coal directly; it is the second- or third-largest earner of foreign currency, there are thousands of communities dependent on it … Mpumalanga is a coal region. So we’ve got to manage this responsibly. I don’t see this as an either/or. We’ve got to do both.
As for Thungela, how do you feel about the fact that, after a rocky start, your shares are among the JSE’s best performers this year?
Did I expect the prices to spike as much as they did? Maybe not, but what we’re seeing is a perfect storm
JN: I feel quietly pleased for the shareholders who backed us. We said we thought the supply-demand dynamics were price supportive, we said we had very good assets, we said we’re good operators and these are cash-generative assets, and I think the shareholders who backed us can only be pleased.