EDITORIAL: Eskom coal a burning issue
The 51% requirement for new coal contracts puts SA’s security of supply at risk
The unwinding of coal miner Exxaro’s decade-old black economic empowerment (BEE) ownership deal and the announcement of a new replacement deal highlights all sorts of difficult questions about Eskom’s approach to its coal supply chain as well as about the government’s BEE policies, particularly in relation to the mining industry.
Exxaro had been an empowerment star of the mining industry, an example of how large mining companies could work together to create a majority black-owned coal company that was a key supplier to Eskom and the export market. But the empowerment deal struck in 2006 matured late in 2016 and Exxaro has found it is impossibly challenging to fund another deal that would again achieve more than 50% black ownership. It has proposed to unwind that deal in a way that would minimise the damage to its share price and give the original owners flexibility, while instituting a replacement deal to create a new BEE vehicle that would own 30%.
That is comfortably ahead of the 26% BEE ownership required by the mining charter, but below the 51% that Eskom has required of its coal suppliers for the past two years. Eskom’s acting CEO, Matshela Koko, has responded with a strident Twitter attack on Exxaro, which he has accused of "showing Eskom a finger instead of radically transforming".
The spat touches on the deeper question of why Eskom was allowed in the first place to adopt an approach to BEE in the mining industry that was inconsistent with that of the government. "Radical economic transformation is dealt a heavy blow by Exxaro," Koko told the Twitterati. But it never should have been up to state-owned enterprises to decide policy. That is especially so as the 51% requirement for new coal contracts is so onerous that it puts SA’s security of supply at risk in the medium to longer term.
The Anglo-owned coal mine that was to supply Eskom’s Kusile power station has been put on ice because of the 51% requirement. And although large companies including Exxaro, Anglo and Glencore account for the bulk of the 120-billion tonnes a year of coal that Eskom consumes, many existing contracts expire in the next few years and it is not clear how many will be renewed. Added to that, SA will require an estimated R60bn-R90bn of new investment in at least 10 new coal mines to supply its needs in the medium to longer term, according to the 2013 Coal Roadmap, and it is highly unlikely that undercapitalised BEE players will have the kind of cash to pay for that.
Koko can grandstand as much as he wants to on Twitter, but if he does not have coal, he cannot run his power stations. And even if he can do so with the help of a bunch of shorter-term, smaller contracts now, Eskom may well run into trouble in future. The narrative from Exxaro should be a clear warning of that — it plans to focus increasingly on its export strategy. Exporters do not have to deal with 51% requirements, and the coal that SA could have used simply goes elsewhere.
As it is, there is huge uncertainty about the state of the government’s BEE policy in mining, with the industry and the government still at loggerheads over the clause of once empowered always empowered in the mining charter, and indeed on the new draft charter that the Department of Mineral Resources suddenly published in 2016.
But underlying it all are the big question marks about Eskom and state capture.
Anyone who read the public protector’s state capture report on the way in which Eskom in effect held a large coal supplier — Glencore — to ransom so that it could bring Gupta-linked Tegeta Resources to a sweet deal at Optimum Coal surely cannot help but wonder whether Eskom’s aggressive response to Exxaro suggests more Optimum-like deals are on the cards.