Coal law could benefit SA exporters

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[miningmx.com] — Eskom may be casting an envious glance at Indonesia which is reported to be drafting new legislation that will ban the export of low grade coal by 2014. That’s according to India’s Business Standard which quotes the Indonesian Coal Mining Association as saying the draft legislation would essentially halt export of some 20% of Indonesia’s coal reserves, equal to five billion tonnes.

The legislation is expected to refer to coal energy qualities of less than 5,100 kilocalories. Indonesia is comprised of 17,000 islands, but coal qualities are grouped on a per region basis. So coal from Borneo’s Kalimantan area has a higher calorific value than 5,100 kilocalories identified in the draft legislation; elsewhere, such as coal from Sumatera, however, 45% of total exports would be affected by the draft legislation.

Here in South Africa, the government raised the prospect of a quota that would prevent domestic coal producers exporting low quality coal that might otherwise have found its way to Eskom. This was to protect the security of Eskom’s supplies which were threatened by new furnace technology that allowed, predominantly Indian buyers, willing to buy low quality South African coal.

Eskom, as is now generally known, has secured about 80% of its total coal requirements to 2020, but it is nervous of what happens after that. In fact, Eskom commercial director, Dan Marokane, said at the recent Coaltrans conference in Johannesburg that R100bn in new coal mining investment was needed between now and 2020.

So developments in Indonesia are eye-catching for South Africa’s coal producers, and potentially hands them additional leverage in negotiating coal prices with Eskom. Firstly, they know China’s and India’s insatiable demand for coal is, well, insatiable; at least for now. Secondly, Indonesia and South Africa have emerged as the two main competing suppliers to Asian buyers. You see this when coal prices from Richards Bay get toppy; Asian buyers switch to Indonesia. Demand for South African low grade coal will therefore intensify if Indonesia passes this legislation. This may strain relations between local coal producers and Eskom further, possibly.

Says a South African coal exporter who prefers to remain anonymous: “Is it positive for RB3 (exports from Richards Bay) exporters? Yes, but Indonesia and regulation and vested interests don’t always result in what you imagine they will.

“I don’t think rules apply to everyone equally in Indonesia, so the apparent impact and the actual impact are not the same thing.

An additional point of interest here is the perspective it lends to South Africa’s own somewhat unpredictable regulatory environment. With exports of about 320 million tonnes/year, Indonesia is going to remain a major blip on power generation and steel producer radars. To surprise the market with inward-looking legislation is not a South African trademark. (Incidentally, heaven knows what Tata Steel, which has a 30% stake in two of Indonesia’s largest mines, thinks of the proposed legislation. Or of the Adani Group which wants to invest $1bn in infrastructure there.

There’s also a report from UBS venting some frustration regarding Indonesia’s lack of infrastructure. Increases in annual production are being set at a highly ambitious 500 million tonnes/year from the current level of 320 million tonnes. “There has been no significant improvement in infrastructure,’ says Andreas Bokkenheuser, a UBS analyst quoted by the Business Standard. “It remains under-invested,’ he added. Sound familiar anyone?

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