April 4 (Bloomberg) -- South African President Jacob Zuma has forecast a “great future” for relations with India as he pushes for a partnership with one of the world’s fastest-growing economies.
Side effects for his country may include higher inflation and a power crisis.
Indian purchases of South African coal are beginning to suck up the low-quality fossil fuel used by national utility Eskom Holdings Ltd., which is spending $56 billion on a five-year expansion. As miners like Anglo American Plc and Xstrata Plc benefit from a 44 percent jump in prices over the last year, the government and Eskom say exports may need to be controlled.
“The price of coal is much more important than just for Eskom,” Cornelis van der Waal, an energy analyst at Frost & Sullivan, said from Cape Town on March 18. “It’s the government’s duty to intervene to ensure that the bigger interest of the country, and not just the coal-mining groups, derive the benefit of the minerals of the country.”
Nations including Indonesia, the world’s largest exporter of power-plant coal, are considering restrictions on mineral exports to safeguard their economies. South Africa relies on coal for 93 percent of its 40,870-megawatt power-generation capacity. That’s the most of 12 countries heavily dependent on the fuel, according to London’s World Coal Association.
While South Africa has traditionally been the biggest source of high-quality coal needed by western European power plants, India became the largest market for its exports last year, buying more than a third of the 63 million metric tons shipped through Richards Bay Coal Terminal, or a 10th of South Africa’s total production.
That’s 11 times the volumes shipped five years ago, Geneva-based coal trader Comptoir Balland-Brugneaux SARL said in a February presentation in Cape Town. Indian buyers are willing to purchase coal that generates less heat per ton than European buyers.
South Africa’s biggest coal miners say it’s a “fallacy” that demand from India will compromise Eskom’s ability to supply power.
“Heavy-handed mechanisms” may have unintended consequences that “may well prejudice security of primary energy supply,” Johannesburg’s Chamber of Mines, which represents the largest producers including BHP Billiton Ltd. and Exxaro Resources Ltd., said in a February statement. Anglo and Xstrata declined to make additional comment.
India’s coal imports may rise to 600 million tons in 2030 from 2010’s 85 million tons, Kolkata-based mjunction services Ltd., a web-based commodity trader, said in a February presentation. The government is increasing power capacity by 18 percent to 200,000 megawatts by 2012.
“India is probably left with no option but to import lower grades of coal because of growing demand and insufficient domestic production,” said K. Sriram, general manager of Singapore’s Trust Energy Resources Ltd., a unit of Tata Power Co., which is building a 4,000-megawatt power plant in India to use imported coal.
For Eskom, competition is not welcome. It struggled to finance expansion after a January 2008 power shortage, in part caused by inadequate coal stocks, closed most of the country’s mines and metal smelters for five days. Further power-price increases will meet opposition after Eskom won regulatory approval to raise prices by about 25 percent annually last year, this year and in 2012. South Africa’s annual inflation is 3.7 percent.
“Eskom faces a substantial challenge in securing the long-term coal supplies it requires,” Dan Marokane, Eskom’s chief commercial officer, said in an interview in Cape Town. Eskom, which burns about 120 million tons of coal annually, may lose 525 million tons to competition over the next 20 years and South Africa can’t afford power generated with coal purchased at “global” prices, he said.
Export restrictions and increased powers for ministerial intervention could curb prices, he said in a separate presentation.
While Eskom doesn’t disclose the price it pays for coal, it probably pays less than 200 rand ($29) a ton, Anton Eberhard, a member of Zuma’s National Planning Commission, wrote in a January report. That’s a quarter of the average price of exports from Richards Bay.
Eskom buys most of its coal through contracts, which will need to be renegotiated when they expire, and the rest on the spot market. Eskom is currently in talks with Anglo over supplies for a new plant, Kusile, that will use 17 million tons of coal annually.
“A balance has to be found between pursuing the principles of a free market while taking into account the needs of the country,” Mineral Resources Minister Susan Shabangu said at a Cape Town conference. “The lack of regulation of the coal mining industry resulted in a shift in the power balance away from the national interest to that of the shareholders of the mining companies.” This is affecting the quality and cost of supply to Eskom, she said.
While Eskom is lobbying for a curb on coal exports, South Africa’s trade ministry and president are pushing ties with India.
South Africa in December gained admission to the so-called BRIC group of the world’s biggest emerging market economies -- India, China, Russia and Brazil. MMTC Ltd., India’s biggest state-run trading company, opened an office in Johannesburg in January and said it planned to boost imports of coal into India. South African Trade Minister Rob Davies spoke at that opening.
“Everybody’s talking about the Asian markets,” Mike Teke, chief executive officer of Optimum Coal Holdings Ltd., South Africa’s fourth-largest coal exporter, told investors in February. “We’re seeing huge demand.”
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