Xavier Prevost. Picture: BRETT ELOFF
Xavier Prevost. Picture: BRETT ELOFF

LAST gasp for coal mining industry: it’s the type of news headline we’ve become accustomed to in recent months. Coal analysts say the sector faces a bleak future. Are they correct? Coal prices have declined by about 65% between August 2011 and March 2016.

This has had a huge impact on producers and exporters, particularly in Indonesia, but also Australia, the US, SA and Colombia. Large companies, especially in the US, face bankruptcy.

But how have SA companies performed? In 2016, many small mines have ceased production. Some are waiting for better times, while others are under administration, near final closure. Most big mines held by the major companies still produce coal, some at a slower tempo.

SA coal exporters have to deal with the same price slumps as other exporters. What is different is that SA has a strong local market which during 2015 made R56.6bn, while exports generated R46.9bn, 17% less.

SA’s export revenue was 36% more in 2008, when prices were much higher, than its inland sales. Not every country that relies on exports can use more coal locally like SA can. Indonesia is now trying to do that, by increasing local power generation and reducing exports.

SA’s inland industry consumes 71% of the coal produced in the country, thanks to coal-fired power plants. Inland coal sales, I believe, could save the coal mines. In 2015 coal was shared by electricity generation (64%), Sasol (22%), industry (9.5%) and traders (4.5%).

But does SA have enough energy coal for the future?

Most large producers will soon have to renegotiate their contracts. Many will need to make new investments to increase or maintain their production levels. If the investment finance is not available now, mines will cut production or cease operations by about 2020.

Companies have not invested, because of the weak global economy and the notion that coal mines don’t make good investments anymore. The belief that Eskom should only buy coal on contract, rather than co-invest in mines, and the 51% BEE Eskom coal procurement requirement, have also contributed to low investment.

This hampers support for a stronger, more dynamic coal industry in SA.

Annual production rose marginally until 2008, and has since stabilised. New projects are abundant: we have never had so many prospecting and mining licences. But it has become difficult to secure finance for mines. Production levels could decrease sharply as soon as large mines reach the end of their design lives.

To survive, SA needs a leaner, tougher coal industry, one that accepts the reality of smaller profit margins, lower seaborne prices and legislation that, if implemented, will have a negative impact on mines.

Exports are not producing enough income to justify expenditure. On the other hand, with new developments in energy supply, inland coal sources need to increase grades and tonnages. Independent power producers could stimulate demand for thermal coal, even if Eskom decreases its coal use.

Global demand will continue to affect SA. Most of our 2015 exports (47%) went to India, but for how long?

Prices are set to continue to drop, so what can SA’s industry do to survive? I believe that the most important answer is to decrease exports in order to increase demand, even slightly, and therefore prices.

Most lower-quality coal could be sold locally, at better prices than exports. Also, higher quality coal could find users in the local market, if they were screened and sized.

One thing is certain: with the ongoing energy crisis in SA, coal prices in the inland market cannot decrease — they may rise.

And analysts agree that coal will remain part of the energy mix for a long time to come. The conditions in the global market have become tougher. But coal’s light is still burning bright.

• Prevost is a senior coal analyst at XMP Consulting

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