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In need of direction

Oilfield Technology,

Crisis and uncertainty continue to envelop the South African mining industry, with politics intruding ever further into the business of mining. Coal export volumes have been worse than flat for the past nine years, with an average annual growth of -0.22% despite an international boom in demand. This was the worst performance of the world’s 11 ranked coal exporting countries, bar one. South Africa is now fifth in the league table of coal exporting countries, with the four above it and five of those below recording average growth of 5 – 20%. The senior director of IHS-CERA’s Global Steam Coal Advisory Service told the 2012 McCloskey Cape Town Coal Conference that the industry’s infrastructure was an unknown, capable of disrupting operations.

Road to ruin

Last month the South African Government hosted the first mining lekgotla – traditionally, a meeting where members of a village comment to their elders, more recently to their politicians – on policies of the Government. The event is planned as an annual strategic dialogue.

Susan Shabangu, South Africa’s minister of mining, described it as “groundwork” for the National Policy Conference of the ruling African National Congress (ANC), where the future role of the state in mining (as proposed by the State Intervention in the Minerals Sector [SIMS] report) will be discussed, as well as the ANC’s annual policy and party elections.

Commenting on the SIMS report, Cynthia Carroll, CEO of Anglo American, said the Government needed to think carefully over policy choices it might make in the coming months. SIMS put forward praiseworthy goals but outlined a way forward that was a “road to ruin paved with good intentions”.

Although the report accurately characterised the belief of the industry that nationalisation would be “an unmitigated disaster”, there are still calls for such a policy and there will undoubtedly be attempts to raise the issue again from the floor at one of the two forthcoming ANC conferences.

Union u-turn

The National Union of Mineworkers (NUM) will be prominent and influential in both forums.

Although initially lukewarm to calls for nationalisation of the mining sector by Julius Malema, former leader of the ANC Youth League, the NUM still supports the SIMS report’s stance against what most people understand as nationalisation. However, the NUM supports many of the proposals for state intervention and also has its own ideas on how resource development should benefit the nation.

The NUM said Malema and his supporters wanted little more than to bail out investors in failed black economic empowerment (BEE) companies, who had been unable or failed to develop mining concessions they had been awarded. Their debts would be absorbed and their investments repaid by the state, with no benefit to the majority of South Africans.

Madoda Sambatha, an NUM representative, told the lekgotla that would be “tantamount to nationalising debt in the form of future environmental liabilities and current social liabilities”. South Africa should not nationalise the mines, but its mineral resources.

Under the NUM’s version of mining nationalisation, the South African Government would apparently “sell” the right to mine a resource at a price it would determine, rather than licence mining for a fee. This would create more revenues and benefit more people, not just the communities around the mines, as Sambatha said was happening under South Africa’s mining-company-led social schemes, which are part of the current BEE legislation.

Something has to happen

The two-year nationalisation row may be morphing into support for state intervention or resource nationalism, but it is still a negative as far as investors are concerned – and not only in mining. Consensus, backed by ministerial statements, is that nationalisation will not happen as originally envisaged, but that a final round of state intervention in the mining sector is more than likely.

At the 2012 Mining Indaba in Cape Town, Trevor Manuel, the minister in charge of the National Planning Commission (NPC), said the mining industry needed to be positioned as a catalyst to drive other changes in the South African economy.

He firmly ruled out nationalisation (although that was before its “rebranding” by the NUM), but clearly said the Government wanted more revenue from the mining sector. Its contribution to the South African economy had shrunk from Rand 103 billion in 1993 to Rand 93 billion in 2009, despite the global commodity boom. The challenge was to reverse that trend.

“The NPC is finalising a cogent case to raise mining output, increase value addition and commit the state to providing infrastructure,” Manuel said. The Government needed to provide policy and regulatory certainty. It would extract rents from the sector in taxes, but invest in mining. There was no reason why mining output could not double in the next decade to support a 7% annual economic growth rate.

Referring to the lekgotla, Shabangu said: “The NUM remarks brought out the obvious truth that, in a development state, it is not a question of whether the state should actively intervene, but simply how and how far it should do so.”

How hard to push?

Just how far has South Africa’s mining industry fallen back – and can it catch up?

During 2010, India accounted for almost one third of South Africa’s coal exports; exports to Asia as a whole for half. Only two months into 2011, shipments to India had already reached 25% of South Africa’s total exports, and to Asia 40%.

As sales to Europe slip back, South Africa is looking to Asia to restore its core coal business. It missed the boom in which China and India established themselves as the world’s development powerhouses. Shabangu may not have said so, but South Africa had been busy hobbling the mining industry with politically-based programmes rather than allowing it to focus on doing what it does best: mine, develop and so enrich the country, allowing perceived financial and social debts to be settled and junior miners to develop in the wake of that.

South African coal’s coming year

Continued growth in China is now under the spotlight and the World Bank has downgraded forecasts.

McCloskey delegates were warned of a comparative slowdown in India. IHS-CERA’s David Price believes growth in demand for coal in both may have been overstated. Figures presented at the McCloskey conference showed power generation in India had slowed sharply over 2011.

Indian steel and power companies have invested US$ 3.3 billion in South African coal exploration companies, giving them access to a total 377 million t resource. They have invested US$ 4.5 billion in Indonesia (6.3 billion t) and US$ 7.6 billion in Australia (17.1 billion t). At present Indonesia accounts for 56% of India’s coal imports, Australia 28%.

Can we connect?

There is, as Ian Hall, chairman of the committee charged with coming up with a scenario for the future of the South African coal industry, puts it: “A disconnect between coal export production and rail and coal terminal logistics.” That disconnect has been around for some years.

Total capacity was until recently enough to export a maximum 72 million tpa of coal. Through the years of BEE legislation came promises from would-be coal miners of tonnages that would rapidly increase exports: the talk was of 100 million tpa.

Both port and rail were put on the line to perform: the terminal commissioned the recently-completed Phase V to 91 million tpa. However, all was not plain sailing, with wrangles over allocations. Exports over 2011 totalled just 64 million t.

Transnet became the whipping boy – and there were delays and derailments. The row is not yet settled, although Transnet has now put in place “Coal 81”. Divyesh Kalan told the McCloskey Conference that by 2015, the railway will have the capacity to move 81 million tpa of coal to RBCT. Kalan also could not resist telling the mining company delegates that the availability of coal was not meeting the tempo being set by Coal 81.

Can South Africa have its coal but not use it?

The Government clearly expects to be able to maintain an export coal industry whichever way the industry goes. It has a 91 million tpa terminal, it will have an 81 million tpa rail line to it – but what odds can there be in favour of Transnet willingly going any further or investors lining up to develop export only mines? Maybe, if they are mega-mines, with mega-support able to compete in a major era of international development. But how feasible is this?

All of the coal companies in South Africa that prosper are multi-product. They sell coal to Eskom to pay their bills and export coal as soon as they can to make a profit. It is hard to understand the point of an extensive BEE programme to help them set up, if the overall plan is to take away their economic baseload.

Eskom told the McCloskey conference that it now sources 30% – around 35 million tpa – of its burn through contracts with junior miners. “The significant volumes we still need to secure – around 40 million tpa from 2018 – provide increasing opportunities for junior miners and the further development of the mining sector,” Marokane said. Only by keeping these miners and others like them in business can BEE in the mining sector mean anything.

Coming up is a housekeeping exercise that has to work. Which direction does South Africa have to take, and on which scenario should it base the future of its energy industry? It has to get the connections right this time.

Written by Barry Baxter.

The full article is available in the July 2012 issue of World Coal magazine, subscribers can login here to view it online.

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