Eskom to Gain From Lower Coal Prices, Chairman Tsotsi Says

Eskom Holdings SOC Ltd., which supplies 95 percent of South Africa’s power, said it supports the government’s proposal to declare coal a strategic resource and should benefit from slumping prices for the fuel.

“We think companies are likely to move to single-digit price” increases in the next few years, Chairman Zola Tsotsi said in an interview in Pretoria, South Africa’s capital, yesterday.

State-owned Eskom, which depends on the fuel for more than 80 percent of power generation, paid 17 percent more for coal in the year through March and is building the world’s third- and fourth-biggest coal-fired plants at about 4,800 megawatts each. Public Enterprises Minister Malusi Gigaba on June 14 said the nation may consider export quotas and legislating the quality of coal allowed after shipments.

South Africa has traditionally supplied high-quality coal to European power plants and kept lower-quality fuel for Eskom’s specially designed facilities. In recent years, rising demand from India for low-quality coal has created competition for Eskom.

Coal prices at Richards Bay, South Africa’s biggest export terminal for the commodity, have fallen 25 percent in the past 12 months to $75.17 a metric ton in the week through June 29, according to IHS McCloskey data on Bloomberg. Shipments from the terminal climbed 14 percent to 5.45 million tons in June from a year earlier, it said on July 2.

“We will likely benefit from the trend of declining international prices,” Tsotsi said.

Price Increases

Eskom’s biggest cost is coal, and the Johannesburg-based company’s largest suppliers of the fuel include Johannesburg-listed Exxaro Resources Ltd., London-based Anglo American Plc and BHP Billiton, the world’s biggest miner.

Power prices have risen an average of 27 percent in each of the past four years to help Eskom fund a 340 billion-rand ($42 billion) expansion plan to overcome a scarcity that temporarily idled mines of companies including Anglo in 2008.

Africa’s biggest power utility last month completed a draft of its price application that will determine what it charges for electricity for each of the five years starting April 1, Eskom said on June 22.

The South African Local Government Association, which represents municipalities, and the National Treasury have 40 days to comment on the draft before Eskom submits a final pricing application to the National Energy Regulator.

‘Single-Digit’ Advances

“One of the assumptions going into the next tariff framework is that over the next five years we would be able to keep coal-price” increases to “single digits,” Gigaba, who has to table the pricing decision in parliament by March 15, said in a separate interview yesterday.

Gigaba met with Mineral Resources Minister Susan Shabangu this week to discuss coal supply security for Eskom, as well as the impact of rising prices of the fuel on South Africa’s electricity tariffs, he said.

The ministers asked their directors-general to draw up a plan to secure affordable coal supplies for Eskom. It will take two months for the officials to compile “a detailed program” together with the Department of Energy and the government-owned Council for Geoscience, Gigaba said.

Dollar-based borrowing costs for Eskom, which plans to raise 60 billion rand through bond sales in the next five years, have declined 166 basis points, or 1.66 percentage points, to 4.26 percent, the lowest since the company sold its first dollar-denominated debt in January last year.

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