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Eskom to thank for SA coal sector’s survival – analyst

But the cost-plus coal price heydays are coming to an end.

South Africa’s coal mining industry would be far worse off than it is right now were it not for Eskom, and should put the troubled energy parastatal at the centre of any plans to revive the sector. This is according to XMP Consulting senior coal analyst Xavier Prévost, who was speaking at a Fossil Fuel Foundation workshop on South Africa’s coal infrastructure on Wednesday.

He said that, after the energy crisis of 2008, Eskom set out to build a stockpile of 45 million tons of coal and that this led to an increase in coal prices in the local market.

Said Prévost: “When they did that, demand for coal in the local market increased, driving prices up. Because Eskom is such a large user, other users of coal in the local market have had to increase their prices, which went up from around R60 to R80 per ton to as high as R120 to R200 per ton after 2008.”

This trend was particularly helpful in lieu of falling commodity prices, which saw coal FOB RBCT approach the R50 per ton mark after plummeting by almost 40% since the start of 2014.

In that time, China took measures to protect its coal industry by introducing restrictions on the amount of high ash and sulphur coal received since the turn of the year. Last October, China applied a 6% tariff on thermal coal imports. The overall result has been a reduction in exports to China, which no longer imports coal from South Africa. Production in the country was largely driven by local consumption. And this is a model Prévost believes South Africa should follow, saying that exports would “never recover their allure”.

But, to do that, SA needs to consume more than the 26 million tons per annum currently used by the inland industry (apart from Eskom and Sasol), to be able to use some of the ±70 million tons exported, at such low prices. However, if Eskom reduces its current prices, or cancels its cost-plus agreements with the big mines, it could destroy what is left of profitability in the industry.

“Eskom does not want to invest in mines anymore and would rather source coal from the open market. The impact of this is going to decrease the amount of coal being produced for Eskom, and local production will also drop radically,” he said.

The coal sector is likely to face trouble as the Eskom heydays come to end to an end. News of jobs cuts at Glencore, for example, could be a regularity in the coming months.

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