ANALYSIS

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  • South Africa will find it increasingly difficult to source coal to fuel its electricity needs.
  • All of the major coal giants have now left, or are leaving the country.
  • India has also now announced new plans that could hurt local mines.  
  • Still, government is making provision for even more coal mines. 
  • For more stories visit Business Insider South Africa.

While some of its politicians continue to imagine that coal has a future in South Africa, two key developments from the real world show that securing coal to fuel power stations may prove a problem in future.

The first is the news that India - the biggest importer of South African coal - plans to cut off imports by 2024. Secondly, key coal supplier Glencore has announced plans to exit the SA coal market.

All of the major coal giants have now left, or are leaving the country. Just two domestic miners, which may struggle to get financing from banks which are under pressure to cut their funding for coal projects, now stand to dominate coal supply.

Exit India

The Institute for Energy Economics and Financial Analysis (IEEFA) reported last year that South Africa’s thermal coal export industry is facing long-term, permanent decline. Quoting 2018 figures, IEEFA noted that while only 30% of South Africa’s thermal coal, the type used in power production, is exported, this accounted for R73-billion in 2018 – half of the value of the industry’s sales.

But India’s pro-renewables energy minister Pralhad Joshi said on Wednesday that coal imports will be phased out within three to four years. India is South Africa’s largest export market for coal, in excess of 60%. This is a huge potential loss for the coal industry, jobs and for the country in export earnings.

India is reviewing coal imports, as is much of Asia, as the country switches to much cheaper renewables, says coal analyst Jesse Burton of climate change think tank E3G. She says that while Europe has been a traditional market for SA coal, this has collapsed in the last five years and that exporters had turned their attention to Asia.

Besides India, SA also exports to Pakistan, South Korea and Vietnam, but these countries all are actively reconsidering their coal usage. Burton says they are switching to renewables for a simple reason: they are cheap.

Exit Glencore

Last week, Swiss head-quartered Glencore, the world’s largest commodity trader, announced its global results which showed declining SA thermal coal revenues, down by 21% to $1 279-million from $1 629-million in 2018.

“Glencore announces a $404m loss in [calendar year] 2019 on a 26% collapse in EBITDA [core earnings, which exclude interest, taxes, depreciation and amortisation] and $2.8bn of impairments on coal and other dud investments,” IEEFA’s Tim Buckley tweeted.

Glencore chief executive Ivan Glasenburg told a conference call that it will allow its coal reserves to deplete so that the company can meet its so-called Scope 3 greenhouse gas emissions, those which are a consequence of the activities of the company, but occur from sources not owned or controlled by the company.

This means that Glencore is expected to exit the SA coal market within 15 years when its mineable reserves are depleted.

Burton says Glencore’s strategy of using up existing reserves and not planning expansions is a rational use of its capital. “Glencore is behaving rationally in a market in decline.”

"Glencore sees that coal is not a growth market and so is allocating its capital accordingly so that it does not end up with stranded assets [those which cannot secure funding as they are not cost competitive with cheaper renewable energy].

While Glencore will be exiting thermal coal as it runs down its reserves, it is increasing spending in transition minerals such as copper, cobalt and nickel which are used to make batteries and electric vehicles.

Implications for Eskom

Glencore’s decision to exit its coal operations in South Africa means that all three major coal miners, Anglo American, South32 and Glencore, have now exited or are exiting their coal investments.

Anglo American and South32, which was spun out of global commodities giant BHP Billiton, have sold or are in the process of selling their thermal coal operations to local company Seriti Resources, which with one other miner, Exxaro, is set to provide over 70% of Eskom’s coal.

Analysts question whether they have the financial strength on their balance sheets compared to the divesting majors, meaning they are much less able to fund their own operations. Banks meanwhile are under pressure to not fund fossil investments such as coal, meaning that this role may increasingly fall to the already overburdened South Africa state.

IEEFA, which tracks divestment from fossil industries, says that 114 globally significant banks and insurers now have formally exited coal, divestment or restriction policies in place. If asset managers are included, this rises to 126.

In March last year a report by the Climate Policy Initiative (CPI), a London-based think tank, identified South African empowerment companies as potentially at risk from this trend. The report said the “transition risk” for smaller South-Africa-focused and empowerment companies could be more than $1-billion.

South Africa's integrated resource plan, intended to guide electricity provision, foresees the country switching to renewables, but also makes provision for some new coal despite renewables being at least 40% cheaper in some instances and the growing investment sentiment against coal.

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