SA Coal is burning out quicker than expected

A report on the export outlook for South African coal published today by the Institute for Energy Economics and Financial Analysis (IEEFA), a respected international energy think-tank, warns that new energy technologies will replace coal-fired power faster than most predict.

Eskom and Sasol, which together take nearly two thirds of the 250 million tonnes of coal produced by South African mines each year, are planning to curb their use of the fossil fuel.

And there are signs that major coal importers like India, Pakistan and South Korea – which together take more than half of South Africa’s coal exports – are either transitioning away from coal or have limited growth potential. As the overall market shrinks, South Africa is expected to face increased competition from other coal exporters such as Indonesia, Australia and Russia.

Waning export demand will hit South African coal miners hard, as thermal coal exports accounted for R73-billion in 2018 – half of the value of the industry's sales, although only a third of its production.

The growing uncompetitiveness of coal-fired power, increased awareness of its social and environmental costs, and pressure worldwide by climate change activism, has forced many top lenders – including three commercial banks in South Africa – to stop financing new coal projects.

Seeing the writing on the wall, several of the world's biggest miners have started to divest from their coal interests, with Rio Tinto becoming the first to exit the industry last year.

As the business case for coal-fired power deteriorates, wind and solar power are rapidly becoming the cheapest source of new generation in many countries. According to Bloomberg New Energy Finance (BNEF), these renewable energy technologies will be cheaper than coal or gas-fired plants virtually everywhere in the world by 2030.

Energy security and the mounting cost of coal imports is a big concern for Asian countries, which were seen as the mainstay of future demand for imported coal. Moody’s Investors Service said in a report in May that risks were rising for coal-fired generators in the region as they are rapidly becoming uneconomic and the transition towards renewables is gathering momentum.

Export market risks

South Africa is more dependent on one country’s demand than any other thermal coal exporter. That country is India, which intends to cut coal imports by one third by 2024, in order to boost domestic production and shift away from coal to reduce dangerous levels of air pollution in many of its cities.

This is worrying because in 2018 about half of South Africa’s coal exports went to India, rising to 60% in the first six months of this year.

Pakistan, South Africa’s second-biggest export market, had ambitious plans for new coal-fired plants, but financial pressure and waning demand in its flagging economy led to the cancellation of one large project in January this year. The government has recently set a target for renewables to reach 30% of installed capacity by 2030, up from 4% now.

Driven by air pollution as well as carbon emission concerns, South Africa’s third biggest export market – South Korea – has stated it will “drastically” cut power generation from coal by banning new coal-fired plants and closing old ones, IEEFA pointed out.

Shifting global dynamic

The shifting global dynamic has implications for South Africa’s entire coal industry.

Nedbank, Standard Bank and FirstRand have all indicated they will not finance either of two new coal power plants planned by independent power producers – Thabametsi and Khanyisa – putting both projects at risk.

Even with Eskom’s new coal-fired power stations Medupi and Kusile slowly coming on stream, a significant portion of Eskom’s old coal-fired plants are already in “cold storage”, unlikely to ever come into service again, while decommissioning of old operating coal-fired power stations is set to continue in the years to 2030 and beyond.

Sasol is also under massive pressure from shareholders, financial institutions and lenders to reduce its coal usage and carbon footprint. Its short-term plans include supplementing Eskom’s grid electricity supply with renewable energy, as well as producing process steam and replacing in-house coal-fired power generation with renewable energy.

The Minerals Council of South Africa says coal export earnings have accounted for an average of 12% of South Africa’s total merchandise exports since 1993. It also points out that net investment in the industry has fallen by an average of 10% a year since 2009, blaming what it calls a “toxic regulatory environment”.

But the trend is evident across the world. The International Energy Agency (IEA) has predicted that investment in renewables will amount to $322-billion a year through to 2025, triple the $116-billion it expects will go to fossil fuel plants.

The IEEFA report points out that, under the IEA’s Sustainable Development Scenario, which assumes nations move towards achieving climate stabilisation, reduced air pollution and universal access to modern energy, global thermal coal trade volumes will drop by 65% by 2040.

But under the IEA’s New Policies Scenario (NPS), based on current global announced policy settings, trade volumes will decline by just 6% by 2040.

Preparing for decline

There is evidence of decline at South Africa’s Richards Bay Coal Terminal, which operated with almost 20% spare capacity in 2018. Terminals at the Port of Newcastle in Australia – the world’s largest coal export port – operated with a 25% surplus capacity in 2018 and a proposed expansion project has been cancelled. The port’s chairman has said there is an “urgent need” for it to diversify away from reliance on coal.