Eskom says 80% of coal contracts secured up to 2020

July02,2011
By Loni Prinsloo

JOHANNESBURG - South African power utility Eskom has contracted 80% of its cumulative coal supply up to 2020, but CEO Brian Dames said on Friday that rising coal prices and competing export markets were growing concerns.

The utility buys 47% of its coal on cost-plus contracts, 24% on fixed-price contracts and 29% on short- to medium-term contracts.

Eskom’s primary energy costs increased by almost 20% to R35.8-billion in 2011, largely owing to a 12.8% a ton increase in the cost of coal. The company expected coal prices to rise by a further 15% in its next financial year.

Dames said that Eskom was transferring some of its short- and medium-term contracts to cost-plus contracts, but that negotiations were challenging, as suppliers were keen to take advantage of the export opportunities, especially as infrastructure plans were coming to fruition.

Over the past two years a new coal category, RB3, has been developed that complies with Indian coal quality requirements, and which means that pricewise, South Africa is now competing directly with global markets.

This created expectations that miners would, in time, be able to export coal at much higher prices, causing some companies to delay the development of new mines, Dames said.

Eskom estimates that about 15 new coal mines would have to come on line in the next two to four years and that R100-billion would have to be invested in the domestic coal mining industry over the next seven years.

Dames said that Eskom was working with the coal mining industry to address this gap in future coal supplies.

He also said coal mine developments should be accelerated in the Waterberg, which is known for its large coal reserves.

Eskom is working with State-owned logistics company Transnet Freight Rail on the construction of a heavy haul rail link between the Waterberg and power stations in Mpumalanga, where most of the utility’s plants are located.

CFO Paul O' Flaherty said that South Africa had to take advantage of its abundant coal resources for the economy to be competitive, but that coal prices had to be kept in check.

South Africa’s electricity is strongly linked to the price of coal, seeing that it still generates more than 90% of its energy from coal. In fact, O' Flaherty pointed out that of the current average tariff of 40c being paid by the utility’s customers, 32c is related to coal costs.

Edited by Mariaan Webb, Miningweekly