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Why coal?

Coal, abundant and easily extracted from the earth, is readily available from countries far removed from the world’s political hot spots. And coal, despite what might widely be believed, can be a relatively “clean” energy source. Contrast this with oil, the other important fossil fuel.

A great deal has been written about the likely effects of global warming due to mankind’s burning of fossil fuels. But while those arguments have considerable merit, against them has to be set mankind’s increasing demand for energy, particularly the growing demand for electricity in developing economies such as those of India, of China and, it should be added, of South Africa where demand is fast outstripping availability. If the world economy is to continue growing and many millions are to escape the trap of energy poverty, mankind will remain reliant on fossil fuels well beyond the current century. But this in its turn will call for measures to limit CO2 emission – fitting thermal power stations with CCS or carbon capture and storage capacity.

At present, South Africa produces fractionally less than 95% of its electricity from coal-fired power stations. That is the world’s highest proportion, and it is a proportion that is unlikely to fall significantly any time soon, not at least until the first new nuclear power stations come on stream. The country has little or no hydroelectricity potential; Eskom cannot delay the construction of new power stations if further “load shedding” is to be reduced; thermal power stations can be built more quickly than nuclear ones; solar and wind power are expensive and only viable in areas remote from the national power grid; and we cannot risk relying overly on imports of power from countries to the north that are blessed with hydro potential.

As a country, South Africa will remain essentially self-sufficient for its electricity, which means that coal can look forward to strongly-growing domestic demand.

This means Eskom may no longer be the only buyer of South African coal that currently falls short of the quality generally demanded by export customers. In the past, coal producers wanting to sell to Eskom have been tied into long-term contracts that, at best, offer steady but unexciting profits. That ostensibly accounts for some 80% of Eskom’s consumption – the remaining 20% is bought on the spot market and at spot market prices. But as Indian import demand grows and as import prices for lower-grade coals start responding to the higher prices of oil and export coal, Eskom could well be faced with paying market-determined export prices for its spot coal purchases.

Another factor that might potentially affect Eskom is the possibility that collieries supplying the inland and export markets might decide to take advantage of the Richards Bay Coal Terminal expansion and wash their coals to produce export-quality products. The implication of this is that the remaining coal they would make available to Eskom could be of a significantly lower grade than at present, causing Eskom to have to burn greater tonnages. This, in its turn, could give better sales opportunities to collieries that focus on South Africa’s inland market.

Domestic South African industrial coal buyers have already experienced this type of competition for the higher grades of coal and are now understood to be paying near export price parity for export-equivalent grade coal being supplied into the inland market.

As the world’s fifth largest producer of coal and its fourth largest exporter, South Africa will continue to play a pivotal role.

In a nutshell, the outlook for coal is bright, which reinforces our positive view of the future of our industry.