Eskom Allowing Arnot Coal Contract to Expire on High Prices

  • Power utility to seek alternative coal supply for Arnot plant
  • Eskom buys Arnot coal at $62/ton; spot price now $47/ton

Eskom Holdings SOC Ltd. will let its contract to get coal from Exxaro Resources Ltd.’s Arnot coal mine expire because the South African power utility considers the cost of the fuel coming from the operation too high.

The companies have been in talks about Arnot’s “high cost of production” and problems with meeting its output targets since 2013, Johannesburg-based Eskom said in an e-mailed statement Tuesday. Despite various meetings, “Exxaro has not been able to address these issues,” the state-owned electricity company said. “This has forced Eskom to allow this contract to expire and to seek an alternative supplier at a lower price,” it said.

The Arnot mine in the eastern Mpumalanga province supplies a 2,352-megawatt power plant of the same name. The facility is one of 14 coal-fired installations that Eskom, which supplies about 95 percent of power to Africa’s most-industrialized economy, uses to generate 83 percent of the electricity it produces. The utility buys coal from Arnot at 900 rand ($62) a metric ton, while local prices for the fuel have declined since the start of 2014 to $47 a ton. Anglo American Plc and South32 Ltd. also supply coal to Eskom.

“Eskom will ultimately be liable to defray all costs related and incidental to the closure of the Arnot mine,” Exxaro said in a statement. The company is continuing talks with Eskom on a “joint closure solution,” and is concerned about the outlook for employees at the mine, Exxaro said.

Job Losses

More than 1,700 jobs could be lost if Eskom doesn’t renew the contract, the National Union of Mineworkers said in a statement. The labor group plans to hand over a memo of grievances to the utility on Wednesday. Exxaro estimates ending the deal could cut production by about 1.4 million metric tons and reduce pre-tax profit by 17.1 million rand.

Exxaro gained 5.8 percent to 47.59 rand a share in Johannesburg on Tuesday, paring the decline this year to 54 percent.

Eskom has been cutting costs to try fill a projected funding shortfall of about 237 billion rand in the five years to 2019. The gap is the result of the energy regulator’s decision to grant the company permission to raise electricity tariffs by less than the utility requested.

South African power prices have risen fourfold in the past 10 years, while inflation has averaged 6.3 percent a year, according to data compiled by Bloomberg.

Eskom issued a public request for proposals to supply Arnot’s coal in August, it said.

“Exxaro had the opportunity to submit its bid just like any other potential supplier,” the utility said. “The RFP is currently being evaluated and the winning bidder will be announced once this process has been completed.”

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