Pro­duc­ers still be­ing shunted

New en­trants pil­ing in but close look at the fun­da­men­tals in­di­cates trou­ble down the line

Finweek English Edition - - FRONT PAGE - BREN­DAN RYAN bren­danr@fin­media24.com

NEW EN­TRANTS TO South Africa’s coal sec­tor had a bucket of cold wa­ter thrown over them at the Coal­trans South Africa con­fer­ence held re­cently in Jo­han­nes­burg. A num­ber of harsh re­al­i­ties were spelt out – in par­tic­u­lar dur­ing the pre­sen­ta­tion given by Ian Hall, who is chair of the South African Coal Road Map Steer­ing Com­mit­tee – while oth­ers be­came ap­par­ent when you “con­nected the dots”.

The key prob­lem area is the con­tin­ued re­stric­tion to ac­cess to the ex­port mar­ket, where Transnet Freight Rail (TFR) is still un­der­per­form­ing badly de­spite claims made at the con­fer­ence by Transnet GM Divyesh Kalan that it “had turned the cor­ner in 2010/2011”.

The other sig­nif­i­cant piece of bad news con­cerned un­cer­tainty about ex­pand­ing rail ac­cess to the Water­berg, where a num­ber of ju­nior coal com­pa­nies have in­vested in projects.

The long-term fu­ture of SA’s coal in­dus­try rests on the Water­berg, which is slated to be­come the dom­i­nant pro­duc­ing coal­field once the ex­ist­ing main re­sources around Wit­bank and Middelburg are mined out. But achiev­ing that will re­quire con­struc­tion of a heavy-haul rail­way line link­ing the Water­berg to Wit­bank. And it be­came clear at the con­fer­ence that Eskom, for one, doesn’t seem so sure that’s go­ing to hap­pen.

If that line isn’t built – or if there are lengthy de­lays in its con­struc­tion – it would be bad news for the de­vel­op­ment plans of com­pa­nies such as ASX-and JSE-listed Re­sources Gen­er­a­tion, ASX-and JSE-listed Fire­stone En­ergy and new­comer Na­mane En­ergy, which plans to list on the JSE next month.

Con­struc­tion of that line is deemed vi­tal to bring Water­berg coal to sup­ply var­i­ous Eskom power sta­tions in Mpumalanga and so keep them run­ning af­ter coal cur­rently avail­able around Wit­bank/ Middelburg runs out. The line would also link into the ex­ist­ing Wit­bank/Richards Bay line, al­low­ing Water­berg coal to be ex­ported through the Richards Bay Coal Ter­mi­nal (RBCT).

So Hall’s gloomy as­sess­ment of the state of SA’s coal sec­tor un­der the In­te­grated Re­source Plan 2010 (IRP2) – which has been ac­cepted by Gov­ern­ment as a blue­print for meet­ing the coun­try’s en­ergy re­quire­ments through to 2030 – has to be viewed as a “wake-up call” for in­vestors.

Hall de­scribed the IRP2 plan as “a pretty grim sce­nario if you’re a coal pro­ducer”. It calls for huge in­vest­ments in nu­clear and re­new­able sources of en­ergy and down­plays the role of coal. Hall reck­ons if the IRP2 is im­ple­mented as planned then coal re­serves in the Water­berg, Sout­pans­berg and Lim­popo fields will re­main largely un­de­vel­oped be­cause there will be no fur­ther sig­nif­i­cant in­vest­ment in SA’s coal in­dus­try.

Hall also says there will be no need for any ma­jor ex­pan­sion of SA’s rail in­fra­struc­ture. Hall com­ments: “Eskom would se­cure its coal re­quire­ments from the Cen­tral Basin (the coal­fields around Wit­bank and Middelburg) through hav­ing

re­stric­tions im­posed on coal ex­ports.”

An­swer­ing a ques­tion from the floor about the rea­son for Eskom’s lob­by­ing for con­trols on coal ex­ports, Hall replied the State util­ity was work­ing on the as­sump­tion its sta­tions would only be able to source coal from the Cen­tral Basin. He added: “If you as­sume there’s go­ing to be no fur­ther in­fras­truc­tural de­vel­op­ment – in that the rail­way lines re­quired to bring coal to the power sta­tions in Mpumalanga from the Water­berg will not be built – then Eskom is cor­rect. They prob­a­bly will run out of the low-grade coal they need, which is why they want to limit ex­ports.”

Speak­ing af­ter Hall at the con­fer­ence was Eskom chief com­mer­cial of­fi­cer Dan Marokane. Asked for his re­ac­tion to Hall’s gloomy sce­nario, Marokane listed a string of risk fac­tors that could af­fect fu­ture coal sup­ply from the new re­gions. These in­cluded 1,2bn t of coal that Eskom viewed as be­ing “at risk to pro­ject de­lays be­tween now and 2039”. He also cited in­fras­truc­tural chal­lenges, such as the sup­ply of suf­fi­cient wa­ter to the planned new coal mines in the Water­berg and the need for a heavy haul coal line from the Water­berg to Wit­bank. Marokane es­ti­mated that line would cost be­tween R10bn and R40bn to build, de­pend­ing on railage vol­ume re­quire­ments.

He re­peated Eskom’s stance that the util­ity didn’t want to block coal ex­ports but felt there had to be a bal­ance be­tween the sup­ply re­quire­ments of the do­mes­tic and ex­port mar­kets.

Of course, lim­it­ing coal ex­ports would be very bad news for in­vest­ment into SA’s coal sec­tor, but TFR is al­ready do­ing a good job of lim­it­ing coal ex­ports through its cur­rent in­abil­ity to rail coal. The RBCT now has the ca­pac­ity to ex­port 91m t of coal a year. Transnet’s cur­rent bud­get pro­vides for the pro­vi­sion of 81m t/year of railage ca­pac­ity by 2015/2016. How­ever, TFR only man­aged to de­liver 63,4m t to the RBCT dur­ing calendar 2010 and by end-May this year was run­ning at an an­nu­alised level of just 61m t.

De­spite that Kalan says TFR will rail 73m t of coal in its fi­nan­cial year to endMarch 2012 and will do so by rail­ing at an

In­stalling 17GW of re­new­able en­ergy and 10GW of nu­clear en­ergy in SA by 2030 is a very tall or­der

to de­liver

av­er­age rate of 6,4m t/month from June un­til then. How­ever, TFR has only come close to that tar­get twice in the past 12 months, when it man­aged to ex­port 6m t in June and 6,1m t in Septem­ber last year. The monthly av­er­age so far this year is just 5,1mt.

RBCT CEO Ray­mond Chirwa clearly doesn’t be­lieve Kalan be­cause the ter­mi­nal has chopped its fore­cast ex­ports for calendar 2011 from its orig­i­nal es­ti­mate of 70m t to 63,4m t. And a coal in­dus­try source de­scribed TFR’s fore­cast as “a pipedream”.

Now throw in TFR’s ap­par­ent plans to al­lo­cate pref­er­en­tial treat­ment on ex­port railages to em­pow­er­ment coal ju­niors at the ex­pense of the other mem­bers of the RBCT.

Kalan told the con­fer­ence TFR was work­ing on a strat­egy to “un­lock some ca­pac­ity on the Richards Bay cor­ri­dor” for the ju­niors but wouldn’t pro­vide de­tails. Asked if that meant pe­nal­is­ing other ex­porters – given TFR’s in­abil­ity to shift the coal at the re­quired rates – Kalan replied: “That’s a good ques­tion. I’m afraid I can­not say any­thing more at this stage.”

The only good news for the in­dus­try came from Hall in his as­sess­ment the IRP2 plan may have to be re­vised be­cause its tar­gets may not be met. He said: “There’s of­ten a dis­con­nect be­tween pol­icy and im­ple­men­ta­tion – and it’s not just in SA where this hap­pens. What I’m say­ing is that in­stalling 17GW of re­new­able en­ergy and 10GW of nu­clear en­ergy in SA by 2030 is a very tall or­der to de­liver. You have to ask whether it’s go­ing to hap­pen. I can’t an­swer that ques­tion.”

If the IRP2 tar­gets aren’t met the likely re­sult will be to fall back on greater power gen­er­a­tion us­ing coal. Hall says that would “re­sult in the de­vel­op­ment of the Water­berg and Sout­pans­berg fields, the con­struc­tion of more multi-prod­uct mines and the ex­pan­sion of rail in­fra­struc­ture. That’s a win-win for the coal in­dus­try and the coun­try. It will al­low gen­er­a­tion of power at the cheap­est cost as well as an in­crease in coal ex­ports.”

RICHARDS BAY COAL TER­MI­NAL

DAN MAROKANE

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