Eskom in coal price suicide as demand spurs costs
JOHANNESBURG – The surge in Eskom’s coal price is of the company’s own doing, a senior coal analyst at XMP Consulting, Xavier Prévost, has said, as the struggling utility expects to pay sharply higher prices for coal.
Eskom last month projected it would pay 20 percent more for its coal this financial year, after being forced into more expensive short-term supply contracts as cost-plus mine production declined.
At the release of Eskom’s year-end results, Public Enterprises Minister Pravin Gordhan lashed out at the 17 percent coal price increase, including that Eskom paid 14 percent more per ton in the financial year ending March 31, up sharply from its initial target for a 9 percent cost increase.
Gordhan said: “We need to have tough talks as to whether they are serving the national interest. This triple inflation number is not acceptable. I intend to engage with industry.”
Prévost believed the main culprit of coal price increases was not the mines, but Eskom itself.
“Every time they issue a tender to procure coal, they automatically increase demand and that increases prices,” Prevost said.
“Eskom procurement should know, the best way to buy more coal without increasing prices is to negotiate agreements with individual mines, one at a time,” Prévost said.
Eskom entered into new long-term contracts with coal companies at the end of 2018, to address the growing shortfall arising in part from under-investment in coal mines, which had contributed to load shedding.
“I wish we could send an open letter to Gordhan to explain how the coal market works and to dismiss his hopes that mines could help Eskom ‘in the national interest’. Mines have one interest only: to make as much profit as they can. That’s why they’re in business,” said Prévost.
Eskom was reportedly looking to secure between 850 million and 900 million tons of long-term coal supply over the remaining life of eight Mpumalanga power stations via tenders that it will issue later this year.
Minerals Council South Africa chief economist Henk Langenhoven said the de-linking of “contract mines” and the movement to smaller and short-term coal supply contracts has made the export market more appealing to local producers, whose lower-grade thermal coal is sought after in the East, particularly India.
“This has meant that there is a strong international competition for Eskom grade coal. So, Eskom needed to restock and secure longer-term contracts at a time when producers were being lured to export by rising demand and rising international prices,” he said.
Langenhoven said the contracts between coal miners and Eskom were confidential and the Minerals Council was not privy to the details of those.
“What we do know, however, is that Eskom found itself in a particularly vulnerable position in terms of low coal stocks in the 18 months preceding its call to coal miners to assist in providing additional supplies. That was at the end of 2018. Coal producers agreed to support Eskom by supplying an extra 16 million tons of coal to help Eskom replenish its coal stocks,” said Langenhoven.
At the time of these negotiations, rand coal prices at Richards Bay had risen rapidly from a plateau between 2011 and 2015 to add 84 percent between 2015 and 2016 and another 22 percent between 2016 and 2018.
Langenhoven said the minister had not contacted the lobby group.