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.

Finweek English Edition - - FRONT PAGE - By David McKay editorial@fin­week.co.za

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

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