October 2021
While the world focuses on climate change issues and environmentally sustainable alternatives to phase out coal as an energy resource, the prospects for South African coal production remain strong for the coming decades.

However, South African exports have been volatile in recent quarters, declining during the initial stage of the Covid-19 pandemic, recovering in the second half of 2020, but subsequently losing momentum in early 2021. South African market volatility comes as a result of cheaper coal from alternative suppliers becoming available in the export market.

South African coal exports to India have been increasingly affected by strong competition from mid-calorific Australian coal, which has been redirected from markets in China. Domestic coal projects in South Africa have also come under pressure from the South African government’s Integrated Resource Plan, which seeks to diversify power sources to encompass more renewables, battery storage, and liquefied natural gas.

India remains the main destination for South African coal. However, its share of exports has dropped to 44% from 48% in 2020, as exports to China jumped to more than 4Mt in January-July from zero over 2015-20. South Africa’s thermal coal exports in the first seven months of 2021 declined nearly 13% on the year amid logistical constraints, social unrest and a sharp drop in Indian demand.

Indices of South African thermal coal have increased significantly in the last month and are expected to continue to grow until the end of 2021 amid issues with the railway line connecting the coal-mining provinces of South Africa with the port of Richards Bay. According to the Eskom’s forecasts, in 2022 the volume of coal consumption will remain at the level of 2021. A decrease in demand on the part of Eskom for medium-calorie coal in the future may contribute to the growth of its exports, provided logistics problems can be solved.

 

Future Ownership Trends

The exodus of several major coal mining giants has resulted in a shift in the historic ownership trends of South Africa's coal mining operators. This shift is providing opportunities for smaller operators to enter the market. Even though the main coal mining companies do not show any intention of investing in new South African coal mining projects, it remains clear that coal will keep pushing South Africa's energy landscape in the foreseeable future.

South Africa's Integrated Resource Plan stated coal would continue playing a significant role in electricity generation in the country’s foreseeable future. Coal-fired plants represent the largest base of the installed generation capacity and account for the largest share of energy generated.

The extended construction of the Kusile and Medupi power stations highlights the gap that new investors will need to fill as previously established coal miners exit the market. Medupi power station is anticipated to be the 8th largest coal-fired power station in the world when fully operational.

 

Big Departures

Anglo American’s shareholders approved the demerger of its South African thermal coal mining assets in May 2021. Anglo American planned to separate its local thermal coal assets into a different company, Thungela Resources. The new holding company’s shares were listed on the Johannesburg Stock Exchange and the London Stock Exchange in June 2021.

Thungela was set to take ownership of Anglo’s three local mines near Witbank in Mpumalanga – Goedehoop, Greenside and Khwezela – as well as a majority stake in the Zibulo mine and a 50% stake in the Mafube colliery. Additionally, Thungela holds Anglo’s 23% stake in the Richards Bay Coal Terminal.

Anglo American decided to demerge the thermal coal business following a similar decision by South32 to sell South Africa Energy Coal (SAEC) to South African group Seriti Resources in November 2019. Seriti assumed management of SAEC in June 2021 and renamed SAEC as Seriti Power. Previously, Seriti had acquired three coal mining operations from Anglo American in early March 2018.

Likewise, Exxaro Resources announced it is not planning to invest in new thermal coal assets. However, it clarified the company would continue to supply thermal coal to state-owned power utility Eskom’s Medupi and Matimba power stations through its coal contracts. Exxaro is reportedly seeking opportunities in greener energy, acquiring full ownership of two wind farms in the Eastern Cape province in 2019.

On the other hand, Glencore has indicated its intention to continue its coal mining operations until the mines reach the end of their lives. However, Glencore is unlikely to pursue major investments in new coal mining projects in South Africa.

 

Long-term Political Risks

Concerns about policy and regulatory uncertainty are intensified by the ongoing fears about the African National Congress (ANC) leadership’s handling of its factional divisions. International investors are cautious due to the continuing failure of the national political leadership to prevent party-political infighting, which has escalated into large-scale civil unrest. The media has reinforced this sentiment with widespread coverage of the evident failure of law enforcement to intervene. The industry also anticipates government pressure to increase rents and revenues from mining.