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Losing ground (part one)

World Coal,

South Africa is gradually losing its status as the pre-eminent mining country on the African continent. While the sector was once blessed with the latest technology, effective labour laws, a reliable workforce and a robust legal and regulatory framework, the lynchpins of a lucrative industry have been systematically eroded. A potential revival is in sight, with investment in new technology and anticipated heightened domestic demand as power capacity is ramped up, yet challenges remain.

Production capacity

Coal production and exports are vital to the South African economy. Coal sales earned the country Rand 87.8 billion in 2011 and the industry competes with platinum as the country’s top earning mineral resource. In the same year, South Africa was the seventh-largest coal-producing country worldwide with an estimated 8.3 billion t of marketable coal reserves and the sixth largest coal exporter with sales of 72 million t.

South Africa achieved these figures against a backdrop of coal production stagnation at approximately 240 million tpa, owing to depleting mine reserves, declining coal recovery grades and increasing operating costs.

Statism vs the market

Last minute intervention by the South African president, Jacob Zuma, encouraged delegates at the African National Congress (ANC) national conference in Mangaung, in December 2012, to drop the party’s endorsement of the “strategic nationalisation” of some mines, choosing to endorse “strategic state ownership” instead. This semantic move was designed to reassure investors that outright nationalisation of mining assets was off the table, despite the fundamental tenets of strategic state ownership and strategic nationalisation being the same: higher mining taxes and greater state intervention (including more active parastatals and possible export controls) in those sectors deemed critical to the economy. These sectors will include the coal and iron ore sectors, which are considered strategic for energy production and manufacturing.

Government policy in the coal sector reflects the ongoing battle between more statist elements in the Department of Mineral Resources (DMR), Department of Public Enterprises and the Department of Trade and Industry, which favour securing domestic supply and beneficiation, and pro-market elements at the National Planning Commission (NPC), the presidency and the National Treasury, which instead favour an export-oriented strategy. As anticipated, the more statist elements are winning ahead of the May 2014 national elections and will likely continue to do so for the next 5 – 7  years.

On 30 January 2013, Susan Shabangu, the South African minister of mining, announced that the government plans to declare coal a strategic resource in order to ensure domestic supply for the energy parastatal Eskom, which relies on coal for South Africa’s electricity supply and has been hit by blackouts since 2008. This new status will give the state greater discretion to limit exports, although the precise mechanism and timing of new regulations is not clear. The new designation will likely be included as part of pending amendments to the Minerals & Petroleum Resources Development Act (MPRDA) – which were approved by cabinet in December 2012 – which allow the DMR to set beneficiation quotas and prices for strategic resources (including coal and iron ore and, possibly, chromium, manganese and platinum) and provide scope for an export tax. The designation will also speed government efforts to subsidise new coal projects by smaller, majority black-owned miners, potentially through an Eskom-led development fund, and expand the role of the state miner AEMFC in the coal sector.

The amended MPRDA faces significant opposition from miners. Its restrictions may therefore be tempered by negotiations throughout the next year. The amendments are now open for public comment and are highly unlikely to be introduced to parliament before the May 2014 elections.

Eskom, meanwhile, is likely to continue its efforts to draw coal producers (including BHP Billiton, Exxaro, Glencore Xstrata and Anglo American) into a supply pact to provide it with lower-cost coal. Progress on this front would probably ease state pressure. Although details remain unclear, Eskom dropped its opposition to the Xstrata-Glencore merger due to a reported agreement over coal supplies.

It should also be expected that the government will require miners to fund more development projects in mining communities and also demand closer adherence to the housing and community development requirements included in the Mining Charter and the revised Black Economic Empowerment laws.

Infrastructure constraints

Infrastructure constraints blight the mining sector. Railway capacity deficits are one of the most severe challenges and delay the transportation of coal to the Richards Bay coal terminal (RBCT), where it is shipped to the export market. RBCT is the single largest export coal terminal in the world, with a design capacity of 91 million tpa. In 2012, the terminal only transported 68 million t of coal, with South Africa losing significant amounts of potential export revenue.

Logistical and transportation constraints increase the cost of freight, which increases the final selling price, potentially making South Africa’s coal exports uncompetitive in international markets.

Inadequate water supplies, housing and road and rail linkages in the Waterberg coal basin, coupled with difficult geological conditions, are likely to restrain the large-scale mining activities in the area in the short to medium-term.

Some assistance for the mining sector and protection for exports will come from Transnet, the state’s rail operator, which is aiming to increase export capacity to help meet Asian demand. Indeed, the expansion of coal transport infrastructure (Transet plans to spend US$ 32 billion expanding port, rail and pipeline infrastructure) is one area where both statist and more market-oriented factions agree (the battle is more about securing supply), laying the groundwork for more exports in the longer-term.

The government has also announced plans to build a 44 mile pipeline later in 2013 to supply water from De Hoop Dam in the Limpopo province to mines in the Waterberg area. The region has deposits of around 75 billion t of coal, or 40% of South Africa’s resources, according to state power utility Eskom Holdings SOC Ltd, with water shortages representing the main impediment to mining in the region.

To read Part 2 of the article, please click here.

Written by Dr Elizabeth Stephens, JLT Specialty. The article was first published in the August 2013 issue of World Coal.  

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