WHY COAL MINERS ARE QUITTING ESKOM
Although the power utility is the biggest buyer of coal domestically, coal producers are hesitant to do business with the parastatal.
wescoal Holdings is the latest coal mining company seeking to reduce its exposure to Eskom or exit the South African domestic market entirely. Waheed Sulaiman, CEO of Wescoal, said at the firm’s 2016 results presentation last month that the firm was hoping to diversify into exports with 1m tons of product planned.
The reason appears to be Eskom. Sulaiman said he was “working on a detailed plan for exports” because Wescoal was “very exposed to Eskom”. It sold just under 2m tons almost entirely to Eskom in its last financial year.
In an interview with finweek, Sulaiman described negotiating a coal sales agreement (CSA) with the power utility for coal from his firm’s Elandspruit colliery in Mpumalanga as “a long and painful process”.
This is a far cry from Eskom’s message only two years ago when it said it faced a coal supply cliff, and was anxious to secure as much coal as it could before 2018, the date of the anticipated supply deficit.
However, slow economic growth in SA has lessened the demand for power and eased Eskom’s future coal requirements. In addition, the appointment of Brian Molefe as CEO has ushered in a period of stronger financial controls at the utility. Strategically, Molefe also wants to buy more coal on the open market rather than through long-term contracts.
Furthermore, empowerment demands, which require new coal suppliers to Eskom to be 50% black-controlled, as well as newly instituted quality testing, are also making business with Eskom less friendly for suppliers.
Anglo American has already announced plans to sell its domestic coal mines in SA while Mxolisi Mgojo, CEO of Exxaro Resources, said at the firm’s full-year results in March that export coal was strategically a market that it wanted to exploit with more gusto.
Asked if the group would consider buying Anglo’s domestic mines, Mgojo told finweek this month: “Well, I did indicate in our roadshows that if you look at Anglo’s coal assets, there’s only one asset that strategically talks to us.
“And that’s Mafube because we’re a 50:50 joint venture partner so it would just make sense for us if we could also own the other 50%,” he said.
“We are overly exposed already on tied mines; we are already exposed on domestic coal,” he added. Tied mines are operations that exclusively supply coal to Eskom’s power stations on long-term contracts.
Eskom said this month that it would introduce new measures to ensure that coal supplied was of sufficient quality. One of its stipulations is the payment of a “quality deposit by suppliers to Eskom”, which would not be returned in the event the quality was below contracted specifications.
In a press release primarily intended to rebut claims by City Press that it had favoured business with the Gupta family-owned Tegeta, Eskom said that it would also withhold payment to coal suppliers in the event that coal quality at the delivery point was inferior to “contractual qualities”.
Bevan Jones, one of the founders of the GlobalCOAL Index, said the upfront payment of a coal quality deposit was unheard of: “No-one in the international market would ever require that and no business would get done if utilities requested that.” David Brown, CEO of Coal of Africa, declined to comment, adding only that his company wasn’t yet affected by these measures. However Sulaiman said Eskom’s demands were “some of the new issues being put on the table by Eskom. They are making it harder to conclude a long-term contract.”
Slow economic growth in SA has lessened the demand for power and eased Eskom’s future coal requirements.
Brian Molefe CEO of Eskom