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.

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Paul Leonardi's Bio

Paul Leonardi is the Duca Family Professor of Technology Management at UC Santa Barbara. He holds appointments in the Technology Management Program (TMP) and the Department of Communication. He is also the Investment Group of Santa Barbara Founding Director of the Master of Technology Management Program.

Dr. Leonardi’s research, teaching, and consulting focus on helping companies to create and share knowledge more effectively. He is interested in how implementing new technologies and harnessing the power of informal social networks can help companies take advantage of their knowledge assets to create innovative products and services.

He has authored dozens of articles that have appeared in top journals across the fields of management, organization studies, communication studies, and information systems research. He is also the author of three books on innovation and organizational change. He has won major awards for his research from the Academy of Management, the American Sociological Association, the Alfred P. Sloan Foundation, the Association for Information Systems, the International Communication Association, the National Communication Association, and the National Science Foundation.

Over the past decade, he has consulted with for-profit and non-profit organizations about how to improve communication between departments, how to use social technologies to improve internal knowledge sharing, how to structure global product development operations, and how to manage the human aspects of new technology implementation.

Before coming to UCSB, Dr. Leonardi worked at Northwestern University on the faculties of the School of Communication, the McCormick School of Engineering, and the Kellogg School of Management. He received his Ph.D. in Management Science and Engineering from the Center for Work, Technology, and Organization at Stanford University.

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Willem Buhrmann's Bio

 

Willem Buhrmann is an experienced mining professional that has extensive African and international experience in project management, strategy implementation and corporate finance. Willem was previously Business Development Manager (Africa) for Rio Tinto Energy and more recently consulted to the wider mining industry including majors and a variety of juniors. He holds degrees in finance (Chartered Accountant) and the legal world (LL.B.)

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