Winds of change sweep over coal sector
Mbongeni Mguni | Friday June 13, 2014 15:25
A finger licked and held in the air would have been an overly extravagant method of detecting the winds that blew through this week’s resource conference.
A simple cock of the ear in the tea-break discussions or a cursory glance between the lines of “official-speak” during presentations would have been enough to pick up the changes in the air at the 11th edition of the country’s most authoritative mining meet.
In years past, coal sector speakers at the conference each focused on the export potential of their projects, lovingly detailing grades, quantities and each promising investors bountiful returns once railway infrastructure was put in place.
With excitement building around coal as the new “diamond miracle”, most speakers from the coal development sector used the annual conference to highlight their progress in developing coal exports, while other uses such as power generation, were mentioned almost as an afterthought.
The trend was understandable, being driven by government’s Coal Roadmap which had identified coal exports as the primary avenue for extracting value from the country’s estimated coal resources of 212 billion tonnes.
“The quality of Botswana’s coal resources compares favourably with other coals available in the market and is suitable for the export market,” Minerals permanent secretary, Boikobo Paya told mining investors in January 2012.
“In the next two years it will be necessary to commit to the construction of a rail and port solution to facilitate Botswana’s exports and government should be actively involved in supporting the decision making process and the beginning of implementation.”
Besides government’s active backing and encouragement, coal developers were awestruck by rising demand and prices of coal in Asia and Europe, with the prevailing logic being to fast-track a coal mine for exports first. Coal for power station use was unenthusiastically pursued, as such projects were far costlier, relied on tricky purchase agreements and were limited by the extent of transmission lines.
CIC Energy’s harrowing experience in spending more than P1 billion in developing a 1,200 megawatt project only to have the market pulled from under its feet by South Africa in 2009, also turned many in the energy sector away from beneficiating coal through power stations.
“The Mmamabula Energy Project reached a point where everything was in place but failed for political reasons,” recalls Tore Horvei who in 2009 was CIC Energy’s chief operating officer.
“Having been part of that experience was painful I can tell you.”
A year after CIC Energy dropped out of the power project, the company’s neighbour in the eastern Botswana coalfields, Aviva Corp, also dumped its 1,000 MW project for a focus on coal exports, due to market absence.
However, trends in the local energy sector have come full circle and a curious set of circumstances seems to restored lustre to the idea of power generation.
At this week’s resource conference, power stations were once again the buzz, with speaker after speaker extolling the virtues of beneficiating coal rather than “simply exporting raw product”.
Officials at Morupule Coal Mine explain the winds of change in local mining. The country’s sole colliery debuted its offshore exports last year with consignments to Europe, but says it is not keen to go back this year.
“The prices internationally are depressed because of oversupply and our focus for this year is regional,” says Business Development Manager, Matthews Bagopi.
“Exporting offshore for the first time gave us some good lessons and an understanding of what’s happening there.”
Thermal coal prices peaked in 2011 at more than US$140 but have since nosedived to US$79 in May, with some analysts forecasting that they will trend around US$65 towards year-end.
Mashale Phumaphi, Shumba Coal managing director, is even more succinct. The citizen-majority owned coal junior has a one billion tonne thermal coal resource in eastern Botswana.
“We have very good export coal but the current global situation for seaborne thermal coal makes that not very lucrative,” he says.
“Our focus is on power generation where we have done quite a bit of work and coal exports are a secondary objective.
“In the long term, we are confident that the export market will recover and Botswana coal will become attractive once again.”
Besides depressed prices, the tardy development of a substantive export route via rail has some disillusioned investors. While government says work is continuing on three routes – Walvis Bay, Durban and Maputo – little progress has been reported over the years on actual project scale-up.
CIC Energy, which swung away from power development to coal exports on the promise of a rail export route, eventually became easy prey for a takeover when the cash from long-suffering investors began to dry up. After suffering a blow in its power station hopes, CIC Energy formed Trans Africa Rail Consortium with Exxaro and others, bid for the Trans-Kalahari Rail project, then watched its dreams go up in smoke again as the project was deferred.
An update by Minerals PS, Paya, on Monday, with progress reports on all three options, was met with muted silence by investors who have heard similar hope-inducing promises in the past three years.
The swing back to power stations also seems motivated by government’s impending unveiling of 600 MW in power supply tenders that the market has been eagerly awaiting.
A total of 15 bidders, including several mega-corporations and local entities, have been shortlisted for the two 300MW tenders with government due to issue requests for proposals in June and July.
“The two tenders have excited the market due to the possibilities they hold, even for companies that do not necessarily win the tender itself,” explained a mid-level manager with an exploration company.
“There are benefits that will flow through to other players in the market, especially with the greenfield, where the type of fuel to be used is up to the bidder.”
The 600MW contract, other analysts explain, has reminded coal developers of the basics in coal exploration. According to one, export coal would never have been a viable option for any project, in the absence of a power station.
“In any coal exploration, there will be a higher cost associated with extracting the better grades,” says the analyst.
“An investor could spend US$10 million digging out or processing inferior coal, to get to the superior which is worth US$60 million. However, one does not then stockpile US$10 million worth of rock.
“Some value has to be derived from it and the best way is an onsite power station fed with the inferior grades.”
The renewed focus on power generation is also triggered by tantalising figures indicating a current electricity deficit of 24,650MW in Botswana, Namibia, Zambia, Zimbabwe and South Africa. The regional giant, South Africa, alone, is projected to have a supply deficit of 32,000MW by 2030.
“Even if we established 10 x 300MW power stations in Botswana, that still would not scratch the surface of the regional deficit,” says another analyst.
With most governments in the region accepting the Independent Power Producer concept and even contracting significant supply, the future looks rosy for power generation.
The local coal market has also been shaken up by news that Canadian mining giant, First Quantum, is on the hunt for significant power supply in the region for its Zambian mega-project. The latest developments are winds in the sails of government’s beneficiation policy, which many argued had missed the boat with diamonds.