South Africa finally cracks
Roman Grynberg | Friday July 11, 2014 15:23
Now just imagine if President Masire had leaned across the table in 1982 and said to Shell ‘Look, we know that these coal deposits and the railroad across the Kalahari are not viable at this price but we know that building a new railway to the coast is of such national importance to Botswana that we will fund it in part’. What would have happened? First, by now Botswana would almost certainly be a coal and base metal powerhouse supplying the global market from what would by now be a dozen or so different mines. Second, the down side is that there would have been long periods of time when prices of coal and other base metals like iron ore were very low and when the mines would have had to be shut and the government would have been left paying the interest charge and upkeep on a railroad that at the time was going through what was then a war zone ie Namibia or alternatively to Mozambique via Zimbabwe. With each peak in energy prices we have had a lot of discussion of the railroad and each time we have missed the boat- last time in 2008 it was literally the boat to China. There have been three major peaks of energy prices in the last 40 years. One in 1973 with the Yom Kippur war in the Middle East, the second in 1980 with the revolution in Iran and the third which President Masire was suggesting, was when coal prices peaked at around $170/tonne in June 2008 with the boom in China/India imports. Coal prices are now running at $76/tonne in June 2014 and instead of exports, beneficiation is the word of the day.
Botswana subsidising a railroad across the then SW Africa in the middle of a liberation struggle would never have been possible. But we have missed the coal price peak again and it is by no means obvious that there will be another one in the immediate future. Between the Iranian revolution in 1979 and the China/India peak in 2008 was a period of almost 30 years.
‘The stone age didn’t end because we ran out of stones’
Slowly, but inexorably coal is becoming yesterday’s technology and much cheaper forms of electricity generation are starting to replace it all over the world. Not only is on-shore wind power much cheaper than coal but since the advent of fracking in the USA gas prices have tumbled making electricity generated from gas much cheaper than coal. Given the developments in the solar energy industry with the entry of China in the solar market and the fierce competition that it is generating, there is the quite reasonable expectation in the USA that solar prices will drop below that of coal by around 2020. As Sheik Zakir Yamani the former Saudi Arabian oil minister once famously said, ‘The stone age didn’t end because we ran out of stones’. Importantly it ended because we human beings developed better materials for making tools. The same will occur with coal and hydrocarbon age no matter what the mine owners or those few remaining believers in a Climate Change convention would prefer to believe.
Right now in Botswana beneficiation is the flavour of the month in large measure because those who own iron ore and coal deposits know, like African Energy, that their resource is worthless at current prices and given the cost of transport to the coast. We have a railway already that runs to Maputo via Zimbabwe and another to Richards Bay and other ports in South Africa that could handle some coal exports to Asia.
However, they are either so inefficient or as in the case of Richards Bay, so congested that they could not possibly handle our proposed exports of 50 million tonnes of coal. If we are to reach capacity we will need a new heavy haul line. Transnet has indicated to Botswana that it would build a spur from the Waterberg to the Mmamabula coal mines, 120 km at a cost of ZAR 40 billion. But President Masire along with many other leaders and policy makers in Botswana wanted the trans-Kalahari precisely because they did not want to be dependent upon South Africa. The end of apartheid has not changed that desire.
South Africa finally cracks
The South Africans are running out of coal to feed their thermal power plants and they want Botswana’s coal to be shipped to Mpumalanga and Gauteng. But when in 2004 CIC proposed a 3,200 MW power plant that would supply both Botswana and South Africa, South Africa simply canned the project. Had it been built at the time many of the problems that both countries have faced with power supplies could not have occurred. The Eskom business model has been that independent power producers are acceptable when it comes to exotic sources of energy like solar or wind but thermal power was seen as the core business of Eskom and neither they nor the South African government wanted IPPs in the sector. But last week the South African Department of Energy finally cracked and called for expressions of interest for the first time for thermal coal based IPPs for some four power plants at 600MW each. Finally what was not possible for CIC energy a decade ago is now becoming possible for Jindal, which is CIC’s successor. African Energy Resources recently completed its pre-feasibility study on Mmamabula West deposit.
The results suggested that the mine could not possibly export coal profitably at the current price and with the existing rail infrastructure. But there is now good news on the horizon from Zambia. African Energy may well either be developing one of its fields at Sesse to sell 300 MW of electricity to Zesco or selling directly to the mining giant First Quantum which is expanding its massive copper smelting and refining operations in Zambia and is in desperate need of power which cannot be readily generated in Zambia. It is rumoured that First Quantum may soon acquire some of African Energy’s coal deposits and self-generate.
The possibilities of beneficiating our coal and selling electricity in South Africa and Zambia are positive but it would certainly be helped by some commercial diplomacy from government to make sure that Botswana based producers get a substantial chunk of the emerging thermal energy market in South Africa and that Zambia is supportive of First Quantum. Things look much better now than a decade ago when CIC failed to penetrate but government assistance to the private sector is vital to achieve the desired objectives and cut a deal with President Zuma where we get to sell them electricity and they get their coal and railroad.
*These are the views of Professor Roman Grynberg and not necessarily those of any institution with which he may be affiliated.