SA Govt to discuss price indexation with coal sector to contain Eskom cost inflation

Gwede Mantashe, mines and energy minister, South Africa

THE South African government would ask the country’s coal producers to consider indexing the price of coal supplied to Eskom, the state-owned power utility, in an attempt to contain price inflation.

“We are not going to coal producers to ask them to sell below the cost of production, but to discuss what is a reasonable level of coal price,” said Gwede Mantashe, minerals resources and energy minister.

“We won’t index coal unilaterally, but there is a session to identify those reasonable levels,” he said. “Not all producers produce at the same cost. We will also discuss a mechanism for the adjustment of prices where necessary.”

The meeting between the Department of Mineral Resources and Energy has been set aside for September 27.

Eskom disclosed at its 2018 financial year-end results presentation in August that its coal procurement costs had increased 17% year-on-year. Public enterprises minister, Pravin Gordhan, said at the time he wanted to meet with coal producers to discuss reducing the rate of inflation on primary energy.

A price index has been discussed over many years in South Africa’s coal sector – including establishing an inland terminal that would enable price discovery which would be helpful to the scores of junior coal miners – to no avail.

Currently Eskom signs coal supply agreements on a confidential basis, including supply deals on a cost plus basis in which the utility pays for the development of a mine provided the operator, a mining company, sells coal exclusively at a fixed quality and price above its cost of production.

Quite how an index will dovetail or even replace cost plus coal contracts will be one of the areas that Mantashe hopes will be negotiated. “The primary objective is to supply the country with cost effective coal,” he said.

 

3 COMMENTS

  1. Who is the “coal sector”? – only the large players are represented by the Minerals Council, which people forget is an employer body that exists primarily to negotiate with organized labour. It would be illegal in terms of competition law for the industry to get together and even begin to discuss pricing. Coal companies are competitors – the kind of co-operation clever Gwede wants to see is actually the crime of collusion. Perhaps Minister Patel should call him aside and have a word?

  2. Prior to 2010 Eskom used to negotiate coal prices based on an open book (full disclosure of all costs and capital expenses) and a modest/fair return on capital invested plus indexed cost of transport to the contracted power station. The return on capital had to be just enough to incentivise the development of new mines. That is why every colliery had a different price. The fair return on capital was what was fixed. Then Eskom went rogue and corruption took over.

    An indexed price will result in super profits for some companies and fail to attract capex to others. Eskom needs to simply return to the pre 2010 model where the mining companies return on capital was what is targetted in price negotiations, not the coal per ton price.

  3. The export netback price of coal should remain weak for at least the next 5 – 10 years as the international coal sector continues to experience demand destruction. Thus all miners will want to supply Eskom if they can guarantee a fixed return (subsidy) to mines. In that case the cheapest option will be a market (www.sourcemarkets.co.za) should Eskom wish to use it. Otherwise, how embarrassing if Eskom ends up paying more than export prices for their lower grades of coal. That would be another own goal and result ultimately in even more jobs being lost.

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