Eskom rethinks coal supply model, spurns Exxaro
It will be easier said than done for Eskom to move its coal suppliers from cost plus contracts to more commercial terms. That’s t he implication of comments made recently by Exxaro Resources.
The firm believes that negotiations with Eskom will be relatively complex and time-consuming and could involve having to commission a full bankable feasibility study for each operation where a fixed-cost arrangement is in place.
Fixed-cost supply of coal was a way of financing new coal builds at a time when South Africa and Eskom were in a very different place. Back then, in the 1980s, Eskom was cash-rich and coal supplies were shallower and cheaper to access.
The arrangement was for Eskom to pay for the capital cost of building the mine, usually near its planned power stations, and lock in a coal price from the mining company that was several percentage points above the cost of production.
Brian Dames, the former CEO of Eskom, complained from time to time that this arrangement was being abused by coal producers. He believed t hat owing to the fact the margin was f i xed, mining companies appointed their less capable mine managers t o s uc h operations.
Acting CEO, Brian Molefe, however, has taken the matter further, saying that he will move away completely from the cost plus model and buy coal from whoever can supply it the cheapest.
Said Molefe in June: “If I were to be there [at Eskom] beyond the middle of Acting CEO of Eskom July, I would say we must have a tender for the supply of coal of a certain grade to an Eskom power station.
“It might not be from the mine next door, but from whoever can supply coal of a certain grade to Eskom. If the mine next door is 5c more expensive, and the mine 200km away can deliver it 5c cheaper, and it is the right grade, we must buy it from there,” he said.
Meanwhile, there’s some concern that Exxaro’s coal supply to Medupi, Eskom’s 4 8 0 0 MW L i mpop o prov i nce power st at i on project, may be further interrupted.
This is based on the comments of HSBC analyst, Derren Maade, who observed in a recent note that Eskom has provided some R8bn for penalties in terms of take-or-pay agreements whereas Exxaro has only booked R3bn. Take-or-pay agreements oblige Eskom to pay a penalt y i f it can’t accept Exxaro’s coal; in this case because Exxaro has built its Grootegeluk coal expansion on time, but Medupi’s units were not being commissioned. This meant Exxaro had to delay revenue even though it had spent capital on Grootegeluk, hence the compensation of the take-or-pay agreement.
Mzila Methanjane, head of strategy f or Exxaro, s a i d t here had been questions about the apparent anomaly in f igures between his company and Eskom. “We can’t really comment on it because we don’t know what provision Eskom is making.”
Said Maade: “We bel i eve t his r epresents upside t o t he c ur r ent contract a nd may s i gnal f ur t her expected delays to Medupi’s ramp-up.”
Eskom had not commented at the time of going to press.
OBLIGE TO PAY A PENALTY IF IT CAN’T ACCEPT EXXARO’S COAL.