It is the predominant fuel source for electricity, providing over 90% of the country’s energy needs. Without coal-derived electricity, industries such as manufacturing, financial services, and social services would be severely crippled, an estimated 430 000 people would be without work or financial means, and the country would stop growing. South Africa, therefore, needs coal to ensure that the economy continues to grow as it diversifies its energy mix into the future.
The current legislation stipulates that mineral resources and reserves are owned by the state, which provides a mining right to mining houses. Mining houses, therefore, have a responsibility to utilise the resources prudently, while Eskom has the duty to ensure that it purchases cost-effective coal. Eskom, as a state-owned company, is mandated by the national government to ensure the security of electricity supply while contributing to the socio-economic development of the country. In order to fulfil this, Eskom’s coal strategy includes procurement of cost-optimal quality coal, security of coal supply, transformation of the industry, increasing supplier competition, and coal logistics integration.
Coal mining is the third-largest employer in the mining sector, with over 87 000 employees. When accounting for interdependent industries of coal such as power generation and transmission, total persons employed increases to at least 130 000. It is estimated that at least an additional 300 000 people solely depend on these employees. The cumulative effect is significantly higher if all downstream support services are included.
Employment opportunities multiply with each coal mine. Maintenance, hospitality, engineering, equipment, geology, construction, and logistics firms, among others, support vital mine functions. Areas outside of the mines often have a thriving local industry to support the mine workers and their families. These roles include teachers, medical workers, and transport providers.
Beyond mines, coal-generated electricity supports South Africa’s industry, which employs over 13.5 million people across a spectrum of sectors, including financial services, manufacturing, trade, and agriculture.
According to the Chamber of Mines, the mining sector accounts for approximately 8.3% of GDP, making it one of the top contributors to annual GDP, with coal mining directly making up 27% of all mineral sales in 2014 and 2015.
In addition, the mining and quarrying industry contributed roughly R32 billion in taxes to the National Treasury last year, making it one of the top-10 tax-paying industries in the country. To put that into context, the Chamber says that R32 billion can be used to build 2 300 new primary schools or 380 000 RDP houses or 21 state-of-the-art hospitals. Furthermore, mining houses account for a fifth of total private sector investment (close to R80 billion) largely towards exploration of new mines, infrastructure, and capital expenditure.
Coal is vital for regional development. The majority of coal deposits lie in Mpumalanga, Limpopo, the Free State, and KwaZulu-Natal. Mining in these provinces contributes up to a quarter of provincial GDP (Mpumalanga and Limpopo) and is the largest source of revenue. Without coal, these provinces would be severely crippled, leading to even higher unemployment plus a lower growth trajectory.
Various economic reports have reported on the direct correlation between an increase in GDP per capita and increased electricity consumption. As South Africa continues its growth trajectory, it will be critical to ensure and enhance security of electricity supply. Though the fuels for electricity generation rightfully continue to diversify, coal is expected to remain relevant. Therefore, this resource will need to be invested in and used wisely.
An international commodity price rout is under way, and the price of thermal coal is currently at multi-year lows. The price of high-quality coal exported from South Africa has dropped by 59% from 2011, and prices now hover around $50 per tonne, although the weakening rand has been able to cushion the lower margins. Due to this market environment, local miners must become more efficient in order to survive and compete globally. Eskom has played a key role in ensuring the survival of this sector, which is currently in distress. The power company has made major capital expenditure investments and built up coal stock to optimum levels at various power stations. Without this key intervention, significant job losses and closing down of more mines would have occurred.
The coal industry’s investment in infrastructure promotes the competitive edge for South Africa to compete internationally and simultaneously improve public infrastructure at home. Coal mining operations, largely in partnership with, or invested in by, Eskom have aided in the development of roads, rail, and ports.
In Mpumalanga, Eskom is investing over R5 billion in building the Majuba railway line for transporting coal. Eskom has also contributed to improving the national and provincial road networks, particularly in the coal belts of Mpumalanga and Limpopo.
According to the Chamber of Mines, upgrades to the Richards Bay Coal Terminal have aided South Africa to increase its coal exports to R52 billion, making coal one of the country’s top-five exports. These investments in infrastructure development have a ripple effect across the economy.
Eskom has also required mines to increase localisation of critical skills. This skills transfer of mining engineers and geologists, infrastructure development, and job creation contribute towards the government’s programme of industrialisation and localisation of the economy.
As part of economic transformation, Eskom partnered with the Department of Mineral Resources (DMR) and the Department of Public Enterprises (DPE) in December 2012 in the development of the Black Emerging Miner (BEM) Strategy. This strategy has been largely successful, with coal from BEMs increasing from R1.7 billion (6%) in 2012 to R6.9 billion (18%) in 2015 and is projected to rise to R8.2 billion in 2016. The concerted effort to actively increase BEM spend has, therefore, worked, and current projections indicate R14 billion BEM spend by 2020. Eskom will continue to incubate and support these miners through long-term contracts and support on requirements to undertake coal mining.
The strategy includes contracting with 51% black-owned companies or suppliers that provide black ownership transformation targets. When including these suppliers, the total black ownership coal spend is expected to rise to R19 billion this year, from R8 billion (25%) in 2013. Going forward, it is Eskom’s objective to create market tension through an open and competitive bidding process to source coal from any suitable supplier.
South Africa generally has lower coal costs due to its high local availability. This has enabled lower overall generation costs and contributed to South Africa having one of the cheapest electricity price tariffs globally. A 2014 survey that was conducted by the US-based NUS Consulting showed that South Africa’s electricity prices, at $0.09c/kWh, were the fourth lowest among the 18 countries that it monitored.
However, in order to ensure that coal is accessible at the required quality, investment is required within these mines. The escalating capital expenditure requested by cost-plus mines is of concern to Eskom. For example, over the next 10 years, Eskom will need to invest over R39 billion in these cost-plus mines, placing further strain on its finances. Such investments are only possible when there is unconstrained capital, and cost-plus mines are performing. It is, therefore, critical that coal does not price itself out of the market and remains competitive compared to other energy sources
It is critical to note that the reduced production volume of a number of cost-plus mines resulted in Eskom sourcing coal from alternative suppliers with higher unit and replacement costs. This is evidenced by the current regulatory clearing account claim, which amounts to R2 billion for coal procurement plus an additional R3 billion for an extended and costly logistics chain