Botswana’s coal industry: Russia/Ukraine war and the rise of the phoenix
Mphoeng Mphoeng | Monday May 30, 2022 14:48
Due to the pressure, we saw Europe and the Western world decide to reduce their coal consumption in the past decade. This was especially prevalent in banking where we saw most companies stop funding anything coal or dirty fuel related. At the recently ended UN Climate Change Conference (COP26) which was held in Glasgow in October to November 2021, most developing nations committed to phasing out the use of coal by 2030 with the latest being 2050.
This evolution of sentiment for coal was a big blow to the local coal industry. Around 2005 Botswana decided to diversify its economy by focusing on coal since we have an estimated 200 billion tons of coal under the ground. This coal would largely be used for local electricity generation but more for export as China and India ramped up consumption of coal as they fed their appetite for industrial and economic growth.
Fifteen years ago Botswana tried to fund a rail project going to Walvis Bay with its primary business case being to transport and export coal to Europe and Asia based on this demand. Sadly as the sentiment to coal changed, so did the demand and it then became near impossible to fund any projects that would be largely based on coal. This meant that companies like Morupule Coal Mine and other private mines were now only able to focus on using their coal to produce electricity rather than exporting to India and China. Botswana was essentially stuck with a ground full of coal and nowhere to take it or no way to take advantage of it. All, it seemed, was lost.
Enter Vladimir Putin and the Russia Ukraine war. Suddenly a commodity which was largely not going to be in use by 2030 got a breath of life. With possible bans on Russian coal, oil and gas about to be announced, suddenly the ability to choose and shut down coal is no longer on the table in EU. With Europe so dependent on Russia, they are now stuck with either facing a very cold winter 2022 or reawakening their coal mines. (Context: more than half the coal plants operating in the 38 countries belonging to the Organisation for Economic Co-operation and Development — a club of rich nations — have retired since 2010 or are on track to do so in the next decade)
Due to the fossil fuel insecurity in Europe, we are now seeing demand for Botswana coal shoot through the roof. The 40 million tons per year being demanded by Europe has sent prices from hovering around $50 to $100 per ton over the past 15 years, to $350 to $400 per ton currently with the expectation that it could hit $500 by end of year. The Russia Ukraine war has proven to be the black swan moment that has brought Christmas early to the ailing industry.
As a result, South African and Botswana coal companies have seen a demand for coal shoot through the roof from Europe with all the previous considerations seemingly being put aside. Commodity traders in Europe are needing to fill the 40 million tonnes sucked out by Russia and this is seeing strong orders coming in which could bring hope to generating growth in our respective economies.
Sadly our challenge and biggest obstacle to taking advantage of this trend is infrastructure.
The first challenge is the infrastructure to mine the coal from the ground as this demand is new and no one knows how long it will be sustained. While this demand is being generated by the Russia Ukraine war, the geopolitical uncertainties mean that even if the war stops, Europe may not be able to trust Russia at least in the short term. So in short run, capacity will be constrained as mines try to ramp up production. (Context: Morupule recently awarded a tender to increase its production capacity from 2.8 to 3.8 million tonnes though I believe it can get to 10 million tonnes if the demand required it.) The only big uncertainty will be how long this situation persists therefore what attitude funders will have to expansion projects.
The second issue is infrastructure to get the coal out the country in a timely and cost effective manner. The rail projects to Walvis Bay and connecting Mmamabula to SA now suddenly have potential business cases but the problem is how quickly you can turn those around and also whether demand will be sustained since these tend to get funded over 15-25 years. This though can be solved short term by trucking to Walvis, Durban, Richards Bay or Maputo.
Which presents the third and trickiest problem of infrastructure: port capacity. So even if you can truck or rail your product to the respective port you will still have a constraint of allocation of port space and time there. That is, you’d still need to be given a slot to dock your boat and offload. This will not be easy with ports already full to capacity and your best hope is that your respective clients have sufficient port allocation if you cannot generate it yourself. In order to increase capacity, ports would need to expand which goes back to the issue of how long this demand will be sustained.
And that for now will be the billion Pula conundrum. How do we as a country take maximum advantage of this coal boom considering all the logistical and financial uncertainties that come with it?
My guess is we’d have five to 10 years of prices at better than historical levels and we must take maximum advantage of the period in order to increase profitability, employment and economic growth.
So for now this will prove to be bad news for environmentalists but depending on how long we forecast this demand and price levels to be, this could be an amazing opportunity for Botswana coal and jobs.
*Mphoeng is a director at MP Consultants, a local citizen-owned corporate finance, economics and business consultancy. Previously, he worked for the University of Botswana as a Lecturer in Accounting and Finance, Botswana Investment Fund Management (BIFM), Standard Chartered Bank and Bank of Botswana