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South African coal faces bleak outlook

Its main export markets are reducing their reliance on the fossil fuel.

South Africa’s coal mining industry is on the brink of permanent decline as the country’s main export markets prepare to reduce reliance on imports and global divestment from fossil fuels increases at an exponential rate.

Eskom and Sasol, which together take nearly two thirds of the 250 million tons of coal produced by South African mines each year, are also planning to curb their use of the fossil fuel. 

A report on the export outlook for South African coal published on Monday by the Institute for Energy Economics and Financial Analysis (IEEFA), a respected international energy think-tank, warns that new energy technologies will replace coal-fired power faster than most predict.

There are already signs that major coal importers like India, Pakistan and South Korea – which together take more than half of South Africa’s coal exports – are either transitioning away from coal or have limited growth potential.

As the overall market shrinks, South Africa is expected to face increased competition from other coal exporters like Indonesia, Australia and Russia.

“South African coal exporters are likely to seek alternative markets going forward as opportunities for growth in the main export destinations dry up. However, the long-term outlook for coal exports to other destinations is also likely to disappoint”, IEEFA said.

Read: SA coal exports seen waning as renewables gather pace

Waning export demand will hit South African coal miners hard, as thermal coal exports accounted for R73 billion in 2018 – half of the value of the industry’s sales, although only a third of its production.

Industry contraction

The growing uncompetitiveness of coal-fired power, increased awareness of its social and environmental costs, and pressure worldwide by climate change activism has forced many top lenders – including three commercial banks in SA – to stop financing new coal projects.

Seeing the writing on the wall, several of the world’s biggest miners have started to divest from their coal interests, with Rio Tinto becoming the first to exit the industry last year.

“Since 2018, a financial institution has announced a restriction on coal financing every two weeks on average.

“In the first half of 2019, that rate increased to one per week”, the IEEFA report says. “Access to coal debt and equity financing is becoming increasingly problematic.”

As the business case for coal-fired power deteriorates, new wind and solar power is rapidly becoming the cheapest source of new generation in many countries.

According to Bloomberg New Energy Finance (BNEF) these renewable energy technologies will be cheaper than coal or gas-fired plants virtually everywhere in the world by 2030.

Energy security and the mounting cost of coal imports are a big concern for Asian countries, which were seen as the mainstay of future demand for imported coal. Moody’s Investors Service said in a report in May that risks were rising for coal-fired generators in the region as they are rapidly becoming uneconomic and the transition towards renewables is gathering momentum.

SA’s main export markets shrinking

South Africa is more dependent on one country’s demand than any other thermal coal exporter. That country is India, which intends to cut coal imports by one third by 2024, in order to boost domestic production and shift away from coal to reduce dangerous levels of air pollution in many of its cities. 

This is worrying because in 2018 about half of South Africa’s coal exports went to India, rising to 60% in the first six months of this year.

Pakistan, South Africa’s second-biggest export market, had ambitious plans for new coal-fired plants, but financial pressure and waning demand in its flagging economy led to the cancellation of one large project in January this year. The government has recently set a target for renewables to reach 30% of installed capacity by 2030, up from 4% now. 

Driven by air pollution as well as carbon emission concerns, South Africa’s third biggest export market – South Korea – has stated it will “drastically” cut power generation from coal by banning new coal-fired plants and closing old ones, IEEFA pointed out.

Shifting global dynamic

The shifting global dynamic has implications for South Africa’s entire coal industry.

Nedbank, Standard Bank and FirstRand have all indicated that they will not finance either of two new coal power plants planned by independent power producers – Thabametsi and Khanyisa – putting both projects at risk.  

Even with Eskom’s new coal-fired power stations Medupi and Kusile slowly coming on stream, a significant portion of Eskom’s old coal-fired plants are already in ‘cold storage’, unlikely to ever come into service again, while decommissioning of old operating coal-fired power stations is set to continue in the years to 2030 and beyond.

Sasol is also under massive pressure from shareholders, financial institutions and lenders to reduce its coal usage and carbon footprint. Its short-term plans include supplementing Eskom’s grid electricity supply with renewable energy, as well as producing process steam and replacing in-house coal-fired power generation with renewable energy.

Export earnings

The Minerals Council of South Africa says that coal export earnings have accounted for an average of 12% of South Africa’s total merchandise exports since 1993. It also points out that net investment in the industry has fallen by an average of 10% a year since 2009, blaming what it calls a “toxic regulatory environment”. 

But the trend is evident across the world. The International Energy Agency (IEA) has predicted that investment in renewables will amount to $322 billion a year through to 2025, triple the $116 billion it expects will go to fossil fuel plants.

The IEEFA report points out that under the IEA’s Sustainable Development Scenario, which assumes nations move towards achieving climate stabilisation, reduced air pollution and universal access to modern energy, global thermal coal trade volumes will drop by 65% by 2040.

But under the IEA’s New Policies Scenario (NPS) based on current global announced policy settings, trade volumes will decline by just 6% by 2040.

“The NPS does not take into account future increases in climate policy ambition and further continued technology change that IEEFA sees as virtually certain to happen. IEEFA is not alone in believing the SDS is a more accurate reflection of the path the world will take going forward,” the report says.

Sector needs to prepare 

There is evidence of decline already at South Africa’s Richards Bay Coal Terminal, which operated with almost 20% spare capacity in 2018. Terminals at the Port of Newcastle in Australia – the world’s largest coal export port – operated with a 25% surplus capacity in 2018 and a proposed expansion project has been cancelled. The port’s chairperson has said there is an “urgent need” for it to diversify away from reliance on coal.

“As Richards Bay faces declining export volumes in the long run, it too will need to plan for an alternative future. That planning should have begun already”, the IEEFA report says.

“The export industry decline will not happen overnight or even in the next few years – there is time for policymakers to prepare for the coming transition in order to plan for the inevitable social and economic consequences,” it adds.

Chris Yelland is investigative editor at EE Publishers and Mariam Isa is an independent journalist.

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This is going to happen faster than anything we have ever seen before . Especially when we see banks not granting loans to fossil burning entities . Eskom needs to realize that renewables is the only thing that can save them now and SA . We slow on the uptake so hopefully someone from Megawatt Park reads Moneywebb .

Anyone who thinks that South Africa can run on renewables is deluded. They have simply not done their research. It has never been done. Renewables can never save Eskom. They cannot produce the right amount of power at the right time at the right price. It has been tried in South Australia, Denmark and Germany and failed. All it has achieved is over-priced electricity and an unstable grid with the requirement to import power from neighbours. I think Zim would be not an option, in this case. When quoting prices for wind and solar, the baseload cost is never included. Baseload in SA is coal. Shut down coal, then one has to go nuclear. Hydro is not an option. Nuclear = lots of moola for the corrupt cadres. Plus lots of moola for the build. net result = bankruptcy for RSA.

It is unlikely the Eskom debt can ever be paid as the value of the future Eskom cash flow is less than the debt. The fact that it has been allowed to get this far is testament to the ANC’s rank incompetence when it comes to doing anything vaguely of worth.

The only solution is the free market. Privatise each coal power station, privatise the grid and electricity sales. Take this away from corrupt municipalities and bring Soweto into the payment net. Let the grid companies buy electricity from whomever they see fit with an arms length free market transaction. Use the money to retire the debt. Any leftover debt can be assumed by the regime.

Any solution cannot involve the ANC, apart from the ANC walking away from the shambles they have created.

@Richard the ?Great
Methinks you are not reading the statistics. India, Pakistan and South Korea are transitioning AWAY from coal. Banks are not financing new coal projects. There’s already decline in Richard’s Bay coal exports. New wind and solar power ARE now cheaper than coal, and costs are continually dropping. Sasol is already supplementing coal with renewable energy. Nobody is denying that we need ‘baseload power’, and coal for the present will supply that. However Kenya’s renewable energy contribution to the national grid is currently 28% and they aim to be powered entirely by renewable energy by 2020. Australia had a 100% increase in investment in large scale clean energy projects in 2018. 87 large scale renewable energy projects have started there in 2019. One in 5 Australian households are now using PV power to reduce their energy costs. Elon Musk’s giant 100Mw/h battery has proven ideal for smoothing out variation in electricity supply, already saving approx. 50 million Aus dollars in costs in keeping the power supply stable. Battery power is becoming ever cheaper. And as for wind power, we have 3000kms of coastline where the wind is always blowing somewhere (check the weather report). The absolute fact is, coal is a dying industry. We can either try and deny the massive benefits of renewables. Or get left behind. Simple.

Instead of building new Crude oil refineries as planned should we not be planning to build Sasol Coal to Fuel plants?

WJS

From what I understand its very expensive and Sasol is looking to exit.
I do think we should be looking towards reducing our vulnerability to oil prices and reliance on coal in general. Renewable energy. Opening sugarcane to producing ethanol. Biofuel from algae and sedges. Generating electricity and fuel from landfill methane, which is a lot less harmful than coal. Etc.
But, the unions will scuttle the plan and that powerhouse of economic foresight — the SA govt– will simply deny all of this as fake news and less important than seizing private property. Because, you know, nationalization is so awesomely effective in preventing inflation caused by weak currencies and rising oil prices.

My view is that SA should be importing the already refined product; not crude. I reckon SA refineries are old, under capitalised, protected by government price fixing and essentially dinosaurs. School me.

When your Government is re active and not pro active, when SOE’s are bankrupt to the point of no return, when hard earned tax money is used to bail out what was once well oiled machines, now a heap of ruin due to blatant theft,BEE, Cader deployment and mismanagement by unskilled people, one begs the question where the money will come from to continue down this abyss. Those exact same tax payers money which is being squandered are leaving our shores in their droves..Yet once again the folk who call themselves leaders are oblivious to this..They don’t understand the concept of “pro-active” until it’s too late and the lights go out forever

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