Weak coal prices set to last as challenges mount for miners

Carbon reduction in COP21 pact is the latest blow to industry suffering from lower demand from China and India, writes Charlotte Mathews

AFTER a year of sliding prices, mining policy uncertainty and labour unrest, the JSE’s coal mining index has taken a severe bruising. It was 5,102 on Tuesday, 60% down from 12,643 at the beginning of the year.

The outlook for next year is no better, as China’s coal offtake remains weak, nations have agreed at the recent climate talks to cut carbon emissions, and SA faces increased political flux.

The latest International Energy Agency report, released in the middle of last month, suggested that by 2040, oil and coal would lose 9% of the global energy mix, offset by increased share from renewables, nuclear and gas. Renewables would overtake coal as the main source of electricity by the early 2030s. By 2040, coal would account for only 30% of electricity generation.

For coal companies operating in SA, challenges have mounted this year. Benchmark coal export prices at the Richards Bay Coal Terminal have fallen to $49/tonne from about $66/tonne in January.

The Mineral and Petroleum Resources Development Act Amendment Bill has stalled and a new minerals minister with no mining background was appointed in September.

A new CEO, Brian Molefe, was appointed at Eskom, which accounts for most of the domestic coal market. Mr Molefe is taking a hardline position on new coal contracts. For all mining companies, the costs of electricity, labour and imported materials have risen faster than inflation this year.

The biggest contributor to the JSE’s coal index is Exxaro, which is under pressure from its iron ore earnings as well as coal. The news from smaller coal miners has been mixed, with boardroom upheavals at Wescoal and Resource Generation, but progress by Coal of Africa in advancing its Makhado project and funding.

In an environment of weakening prices, all companies are trying to improve their margins. Glencore put its lossmaking Optimum Coal mine into business rescue in August and Anglo American plans to sell some of its thermal coal interests in SA.

Xavier Prevost of XMP Consulting says the weak coal price was likely to persist. The earliest improvement will be in 2019, and then it will not be a return to more than $100/tonne but a small increment of $10/tonne or so.

The world’s biggest coal importers are China and India. China’s coal imports are unlikely to return and within a year or two, India should have developed enough of its domestic coal resources to feed its power stations, he says.

But there are still opportu- nities for South African exporters in smaller countries such as Pakistan and Turkey.

Pakistan takes only 3- to 4million tonnes of South African coal a year, but is planning to develop coal-fired power stations because they are affordable and it is more concerned about power than climate change. It has coal resources that it intends to develop, but little is known about their economic viability and quality.

Mr Prevost says many of SA’s coal mines are not making a profit and there has to be industry rationalisation.

Eskom’s offtake is in a state of flux, with Mr Molefe wanting to move away from “cost plus” coal mines to buying on the open market.

But no investments will be made in substantial coal production without a capital contribution from Eskom.

There is hope for South African coal miners, though.

Mr Prevost says the future market may well lie in building independent coal-fired power stations on a small scale to meet the needs of industrial customers rather than selling power to the grid.

World Coal Association CE Benjamin Sporton says after the carbon-reduction agreement at the COP21 conference, the intended nationally determined contributions by each country included, for many, a role for low-emission coal technologies. He calls on governments to support investment in carbon capture and storage.

There were still opportunities for exporters in countries such as Pakistan