The world is changing fast and to keep up you need local knowledge with global context.
The writing is on the wall for thermal-coal and it is not a moment too soon. From the soot covered images of Victorian chimney sweeps depicted in movies to the smoke-puffing stacks of Witbank and the sickening statistics of premature deaths due to air pollution; it is a dirty business. Greenpeace reported in 2018 that South Africa’s coal belt in Eastern Mpumalanga had the most polluting cluster of coal-powered stations in the world, producing record levels of nitrogen dioxide and found that 2,200 premature deaths resulted from the NO2 pollution from Mpumalanga. Added to this is the fact that burning coal is regarded as the biggest single source of carbon dioxide emissions that leads to climate change. And the world is turning away from polluting coal faster than predicted. The US research group, the Institute for Energy Economics and Financial Analysis, reported that South Africa’s thermal-coal exports will drop due to the proliferation of new cheaper energy exports. The government is currently considering a plan by Meridian Economics to establish the world’s largest green-energy financing initiative to mitigate Eskom’s financial woes, which at first glance looks like a win-win situation for energy and pollution and would even placate the unions. Energy analyst, Chris Yelland says there is evidence already in the coal export industry of decline and the industry should start preparing for a future without coal. – Linda van Tilburg
South African coal faces bleak outlook
By Chris Yelland and Mariam Isa*
South Africa’s coal mining industry is on the brink of permanent decline as the country’s main export markets prepare to reduce reliance on imports and global divestment from fossil fuels increases at an exponential rate.
Eskom and Sasol, which together take nearly two thirds of the 250-million tonnes of coal produced by South African mines each year, are also planning to curb their use of the fossil fuel.
The shift away from coal-fired power
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.
There are already 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 like Indonesia, Australia and Russia.
“South African coal exporters are likely to seek alternative markets going forward as opportunities for growth in the main export destinations dry up. However, the long-term outlook for coal exports to other destinations is also likely to disappoint”, IEEFA said.
Waning export demand will hit South African coal miners hard, as thermal coal exports accounted for R73bn 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 SA – 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.
“Since 2018, a financial institution has announced a restriction on coal financing every two weeks on average. In the first half of 2019, that rate increased to one per week”, the IEEFA report says. “Access to coal debt and equity financing is becoming increasingly problematic.”
As the business case for coal-fired power deteriorates, new wind and solar power is 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.
The risks posed by South Africa’s main export markets
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 that 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 that 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 $322bn a year through to 2025, triple the $116bn 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.
“The NPS does not take into account future increases in climate policy ambition and further continued technology change that IEEFA sees as virtually certain to happen. IEEFA is not alone in believing the SDS is a more accurate reflection of the path the world will take going forward”, the report says.
Need to prepare for decline
There is evidence of decline already 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.
“As Richards Bay faces declining export volumes in the long run, it too will need to plan for an alternative future. That planning should have begun already”, the IEEFA report says.
“The export industry decline will not happen overnight or even in the next few years – there is time for policy makers to prepare for the coming transition in order to plan for the inevitable social and economic consequences”, it adds.
- Chris Yelland, EE Publishers, and Mariam Isa, independent journalist.
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