The outlook SA’s coal industry remains generally positive despite increasing pressure for countries to reduce their reliance on fossil fuels and cut carbon emissions, according to African mining sector research specialists, Afriforesight.
Export prices for thermal coal are expected to decline this year after surging in the second half of 2021 amid an energy crunch, but even at lower levels the industry is expected to report higher profits, Afriforesight said in a presentation. It assumes that the global economy will continue to open and recover from the effects of the Covid-19 pandemic and related lockdowns and restrictions.
Afriforesight chief economist Nathan Musson said the global reaction to the most recent wave of infections, which was driven largely by the Omicron variant, served as an indication that countries were beginning to accept Covid-19 as an endemic disease that required less stringent controls.
While Omicron is more transmissible, “the symptoms are less severe, enabling countries to sustainably do away with harsh measures, and allowing economic activity to progress unimpeded,” Musson said.
Other near-term constraints to economic growth, such as supply chain bottlenecks and high energy costs, were also expected to ease by the middle of this year, further underpinning economic activity, Musson said.
The Richards Bay thermal coal price for high-grade coal, which is a benchmark price for export coal, was between $180 and $190 per tonne at the beginning of the year, ensuring high margins for miners.
At that level Afriforesight’s industry profitability measure showed a 50% operating margin for export coal, said Vinesh Chetty, head of energy commodity analysis at Afriforesight.
“Our forecast is for coal export prices to decline, but we expect profitability to remain at about 30%, which means there is still good money to be made from coal.”
Chetty said that during the first, second and third quarters of the year export prices for high-grade coal could drop to about $100 a tonne as India, which buys about half of the coal exported from SA, ramps up domestic production. In addition, natural gas prices, which also increased sharply in the second half of 2021, are expected to moderate in line with softening global oil prices and push coal prices down, he said.
However, even at $100 per tonne coal miners could still enjoy solid margins and, after bottoming out at that level, prices were expected to start rising again gradually, supported by an increase in demand from Asian countries, Chetty said. Prices for lower grades of export coal are expected to follow a similar trend.
“Also propping up these prices is a lack of investment — over the years we have seen the big coal miners such as Rio Tinto, BHP and Anglo American selling out of their thermal coal operations and the smaller players that are getting involved don’t have such strong balance sheets [to support investment],” Chetty said.
Negative global sentiment regarding coal has also made it difficult to obtain funding for new operations, he added. “Lots of banks won’t give you a loan for a thermal coal mine and government institutions are no longer eager to support coal mining development.”
Afriforesight outlook for local coal prices is mixed. On the one hand, Eskom, which is the single largest buyer of thermal coal (the utility accounts for about 45% of local demand), is hoping to renegotiate supply contracts at lower prices. But for other users of industrial coal the trend would most likely mimic export prices and decline during 2022 before gradually rising again in 2023, it said.
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