South Africa’s Coal Industry Faces Dire Future

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Coal is currently considered a dirty commodity, and as a result countries like South Africa, and its coal miners and energy suppliers like Eskom, which are still reliant on coal, need to rethink their long-term strategies.

Coal will continue to be responsible for over 80% of South Africa’s energy supply for the next five years, according to senior GM for private energy, Vusi Mboweni. Eskom, South Africa’s public and primary power supplier, is experiencing something of a reprieve with loadshedding only scheduled to return in August. This follows in the wake of last year’s loadshedding woes, which provoked a sharp decline in investor confidence, South Africa. However, for Mboweni, the trouble will only be out of the way after the new builds are in place. A corollary of this is that each upgrade and new coal powered station will need more coal.

According to Mining Weekly, the majority of South Africa’s electricity is generated by coal-powered stations, and that shows no sign of letting up. Eskom is under pressure to create a stable environment, and moving too sharply towards renewables is primed to do exactly the opposite. There is insufficient capacity, high demand, and a volatile workforce which threaten any option other than the safest.

Despite the steady descent towards a commodities trough, South Africa’s use of coal threatens to come at a considerable cost. The problem is an inefficient system. Each power station is designed differently and consequently requires a different type of coal. What this means is that power-stations are bound to a particular supplier and, when prices rise, the cost must be borne.

The attitude to a solution is bivalent. On the one hand Eskom is looking to buy the cheapest coal available. That could mean looking towards emerging competitors such as Australia, Columbia and Russia, but on the other hand, like the rest of the commodities industry, Eskom is looking to slim down and refine operations in the name of sustainability.

Coal prices have plummeted owing to oversupply driven predominantly by the end of the Chinese-driven super cycle — experts predict an investment “drought”. With global demand down, particularly China’s 32% drop in imports, exporters are in hot water. However, South Africa continues to be a major player thanks to its national development goals — it aims to achieve 95% electrification across households — and will continue to be a buyer of its own coal.

But, South Africa cannot rely solely on its traditional approach to coal mining. Neither will ideological broad statements solve the supply side question. As mines become smaller with reduced quality, the coal mining sector must embrace technology innovation as the key strategic lever to ensure the future of South African electricity generation. Leading the way in this respect, Miners like South32 are already exploring new ways of exporting coal in order to improve their bottom line, while their year-on-year sales continue to improve with 2015 reporting a 13% increase.

Internationally, prices are plummeting, while South African prices are rising because of systemic inefficiencies. While the short-term requires an emphasis on coal, this strategy is not sustainable. What is needed now is a greater focus on innovation, taking miners like South32 as exemplars, and a long-term plan which emphasises renewables.