Coal is a challenging commodity and sector in which to do business. The headwinds that the sector grapples with on a continual basis include a) pressure to move away from fossil fuels for primary energy generation, b) supply of suitable quality thermal coal for the Eskom power stations, to more recently and seemingly unique to South Africa, c) political complications that are hindering its supply for primary use. By: Santosh Gunpath, independent process consultant
Employing short of 90 000 workers, and being the third largest employer (behind gold and PGMs), the coal sector will retain this position for another 30–40 years at least, after which South Africa’s reserves will be mostly depleted.
Globally, South Africa is similar to its emerging market (non-OECD) counterparts and ranks as one of the top five consumers of coal per capita at around 2.4 t of coal per person. This is not expected to change drastically for the foreseeable future, unlike the United States and some parts of China, where there is a significant decline in coal consumption.
Sustaining and supporting the industry is imperative, and any successful solutions need to be industry led initiatives that are heavily supported by government. The ability to viably process (e.g. coal processing in a DMS) increasingly challenging coal seams continues to be restricted by advances made in research (e.g. Coaltech, CSIR, tertiary institutions, etc.) and manufacturing (OEMs and EPCMs). There is a limit to what efficiencies can be attained using process equipment and ‘smart design’ and this has largely been reached in the form of DMS, solid/liquid separation and material sizing, which are some of the major (but not all) operations associated with coal processing.
OEMs that support the industry have in recent years made minor improvements to their respective products, none of which can be cited as being highly innovative. A change to existing equipment or process design that will see a quantum shift in this regard is however unlikely. This is a key concern and danger for the coal industry and I would stress other industries alike.
Furthermore, there is a vested interest in maintaining the status quo. This makes investment in finding alternatives by traditional stakeholders unattractive – as doing so will mean trading existing high profit margin items that are already entrenched in the industry for non guaranteed future revenue as new expensive technologies gain traction, of which the profit margins are unknown.
Looking to the Waterberg
The Waterberg region currently poses the best opportunity for the sector and a number of brave smaller coal producers are in the process of securing reserves (some already have) which will have associated power stations as part of the deliverable. The region remains one of the last coal outposts for South Africa as the easier Natal and Mpumalanga regions are already being mined by the larger role players.
The major challenge in this area is water availability and transport and electrical infrastructure. The solutions to these challenges increase the capital required to develop projects in the regions so asset owners are employing a holistic approach by focusing on other parts of the project, primarily the technology being employed for the power station. Traditional pulverised coal combustion is being replaced with more current technologies such as circulated fluidised beds that are about 5% more efficient.
The on-going importance of coal
Coal must be considered as part of the total energy mix, which includes fossil fuels and alternative energy sources including wind, solar, hydroelectric and natural gas.
The United States has been experiencing a decline in coal use (by approximately 20%) as part of its energy mix since 1950. The combination of coal and natural gas now makes up approximately 65% of the mix, followed by hydropower and “other non-hydro renewables” which make up 15–20%. These four sources constitute 80% of the energy mix. This contrasts drastically with South Africa where coal makes up 70% of the energy mix, followed by crude oil (15%) and other sources (nuclear and renewable).
The reason behind the United States’ coal consumption decline is a surprising one and has nothing to do with environmental reasons, but rather the technology developments in the field of hydraulic fracturing and horizontal drilling which has led to significant increases in natural gas supply.
South Africa’s energy requirements is entrenched in coal-fired Eskom power stations, lower wealth per capita for the larger population, and current lack of firm investment of alternative energy sources. As such, coal will remain the country’s primary supplier of energy. This represents an opportunity for production to meet local and global demand, with the latter being export driven.
Removing the noise surrounding the coal industry as cited earlier, when the macroeconomic fundamentals are taken into account, a solid case can be made for continued investment and commitment of long-term capital into South Africa and the SADC (Mozambique and Botswana) economies which are no doubt being debated at board level. Investment in Mozambique by the likes of Vele and development of the Botswana coal industry is a testament to this.
Nevertheless, this approach must be undertaken in conjunction with innovation in the industry. Coal prices have dropped by 46% over the past six years which has led to the decimation of market capitalisation of many coal miners. This unfortunately cannot be weathered by South Africa’s junior miners which are the current life blood of the industry and our future conglomerates.