COUNTRY IN FOCUS •
It is unclear at this stage what the recovery will look like.
Each economic sector will most likely take its own trajectory,
depending on policy choices of each country. Some could prove
less resilient than others.
The global coal market is one of those severely hit by the
lockdowns. China and India, the markets that boast the lion’s
share of global coal demand, have significantly decreased
imports. This has huge implications for coal exporting countries
like South Africa that exports mostly to India.
In addition, there are already indications of a supply glut that
could drive down international coal prices.
Various global forecasters project coal exports from Richards
Bay Coal Terminal between USD55 and USD70 per ton for
the remainder of 2020. Of course, the upper levels would
be preferable for South African miners. But in the world
characterised by volatility nothing can be certain.
If supply remains constant or increases while demand in
export markets falls further and does not peak anytime soon,
international coal prices could collapse. The risks of such a
possibility are way too high for South Africa.
There will be negative multiplier effects on the South African
economy. High-cost and tight-margin export miners will be out
of business. Jobs will be lost. Much-needed foreign exchange
will be significantly reduced.
The reduction of mining royalties and other taxes will mean
the under-pressure fiscus will suffer. With that comes other
pressures on the sovereign.
To mitigate potential loss of revenue in the export market,
South Africa should consider triggering a positive multiplier
effect in the domestic coal economy in ways that coal producing
countries around the world are most likely will do.
We could use coal – which is the only fuel that simultaneously
satisfies three critical elements of being affordable, abundant
and reliable – to revive domestic manufacturing that has been
in decline for years.
We should be under no illusion that renewables would
replace coal. It would be impossible in South Africa because
of the baseload problem. Any substitute for coal must
provide baseload requirements for the country’s industry and
households for it to be sustainable.
This is feasible in major European countries who have nuclear
and gas options, and are the producers of the renewable
technologies, enjoying the ‘first mover’ technological advantage.
Industry observers expect continued decline in coal-sourced
electricity in those markets.
But countries must consider their unique stages of economic
development and the economic consequences of Covid-19.
Many economies will continue to use coal as baseload because
it has fast-tracked their industrialisation. Among them are
the Philippines, Malaysia, Taiwan Indonesia (a strong and
competitive exporter to China), Vietnam and Cambodia.
Vietnam, a success story in industrialisation that has lifted a
number of people from poverty, is one of the importers of coal.
So is South Korea, a well-developed economy.
The trajectory of the coal prices will, by and large, be driven by
the economic recovery paths of these economies. China and
India will be the largest market influencers.
For now, the prices will remain vulnerable to downside until
these economies have begun to implement Covid-19 economic
recovery plans. Global synchronisation of recovery strategies
would be crucial.
In South Africa, we must prepare for recovery with our unique
circumstances, developmental needs and comparative
advantages in mind. We should not allow key sectors like
coal, and its associated value chain that employ hundreds of
thousands of, people to collapse.
Coal can – and must – survive the Covid-19 storm with less
severe consequences. We owe it to our long-struggling
economy and the workers.
The ferrochrome, ferromanganese and aluminum smelters need
reliable and consistent supply of energy at competitive prices
of which coal is the only source in South Africa. With proper
planning between government and industry players across the
value chains, the difficulties of export market can be turned
around into the fortunes of the domestic coal market.
There is a risk that if coal mines are shut down in the short
term due to collapse of export prices, it might in the long run
result in high prices of coal should the global economy show
signs of recovery in the Covid-19 aftermath. It is important to
keep the mines running because re-starting shut down mines
will be costly.
What complicates matters in South Africa is that coal miners are
facing hostile financial institutions who are under pressure to
stop funding the development of mines. High coal prices, as a
consequence of reduced supply, would also be bad for Eskom.
However, if Eskom’s efficiency improves and the utility is able to
execute a well-managed cost-effective procurement strategy, it
can secure good quality and quantity of coal at the right prices
to the benefit of consumers and coal sector.
Leon Louw
Despite the drop in coal prices, it remains a mainstay in the mining
industry of South Africa.
www. africanmining.co.za
African Mining Publication
African Mining
African Mining • May 2020 • 27