BHP, Anglo Coal Supply Deals to Be Revised, Eskom Says

Wednesday,February 02, 2011
By Carli Lourens

Feb. 2 (Bloomberg) -- Eskom Holdings Ltd., producer of 95 percent of South African power, plans to revise deals with coal mine operators including BHP Billiton Ltd. and Anglo American Plc to secure supplies amid a surge in competing Indian demand.
Eskom has begun talks to spur suppliers to accept prices at “efficient cost, plus fair returns,” Chief Commercial Officer Dan Marokane said in an interview from Cape Town. “About 525 million tons could be at risk from competition with exports,” threatening to make electricity charges unaffordable, he said.
State-run Eskom delivers power to Xstrata Plc’s ferrochrome furnaces, AngloGold Ashanti Ltd.’s gold mines and BHP’s aluminum smelters in South Africa. The utility, one of the 10 largest in the world by capacity, has struggled to fund a 485 billion rand ($68 billion) expansion program to prevent a repetition of the power blackouts that hit mines, factories and cities in 2008.
Eskom, based in Johannesburg, will seek to persuade coal suppliers to accept new terms by reducing the risk of rising production costs for the mine operators, Marokane said today.
Export quotas, restrictions on low-grade coal shipments abroad from Richards Bay and “increased powers for the minister to intervene in the interests of domestic energy security” may also be used to secure domestic power needs, Marokane said.
Xstrata declined to comment on Eskom’s discussions, while Anglo, BHP and Exxaro Resources Ltd., another supplier, didn’t immediately respond to e-mails from Bloomberg seeking reaction.
Competing With India
India competes for South African coal as the Asian country needs a low-grade fuel similar to that used in Eskom’s power plants, more than 80 percent of which are coal-fired. European electricity producers typically only buy higher coal grades.
Asia overtook Europe as the largest foreign buyer of South African coal in the last two years as India boosted purchases.
Richards Bay terminal, which ships almost all of South Africa’s coal for export, sent 59 percent of total shipments to Asia last year and 25 percent to Europe. India is looking to expand electricity generation capacity by 20 percent to 200,000 megawatts from current levels by March 2012.
“Unless a new approach is found, Eskom will find itself paying globally linked coal costs,” Marokane said, adding that a commensurate increase in electricity prices would “counter the aspirations of a growing economy.” Prices of coal shipped through Richards Bay rose about 60 percent last year to $129.75 a metric ton, according to IHS McCloskey data on Bloomberg.
Unaffordable
Eskom is already hiking charges by several-times inflation, on average by 25 percent a year for the three years from 2010, after long keeping prices subdued to stimulate development.
The company, which burnt 123 million tons of coal last fiscal year, has about 95 percent of supplies contracted or committed until 2018. Two new power plants, Medupi and Kusile, will begin generating power in the next few years, adding more than 30 million tons to Eskom’s annual requirement.
The utility is also concerned coal companies will focus on building mines in other countries and the government should make it “more attractive” for companies to dig new mines, Marokane said. Eskom estimates the industry needs to spend 175 billion rand between 2009 and 2020 digging mines to meet rising needs.
South Africa needs a national energy coal development plan, Marokane said. The country mined about 250 million tons of coal in 2009, or 4.1 percent of world output, making it the seventh- largest producer, according to an Oct. 1 report by UBS AG.
(Editors:Tony Barrett,Dan Weeks, sourced bloomberg)