Eskom will have to pay more for coal as threat of “supply cliff” returns says Thungela executive

SOUTH African power utility, Eskom, would be under increased pressure to pay more for coal in the coming years as it was running short of supply, said Bernard Dalton, executive head of marketing for Thungela Resources.

“Eskom has a number of long-term contracts tied to collieries that are ending soon … it will be forced to pay a higher cost for coal given inflation,” he said. Eskom could be forced back to negotiate as early as this winter in order to meet short-term coal requirements, he said.

Dalton was responding to a question during a presentation a day after shareholders in Anglo American voted in favour of the demerger of Anglo Coal, the group’s South African thermal coal assets, to create Thungela Resources.

Thungela Resources will now take a primary listing on the Johannesburg Stock Exchange and a standard listing on the Main Board of the London Stock Exchange on June 7.

Dalton was asked whether a massive coal supply deficit was developing in South Africa. Once described as “a coal cliff” several years ago, the deficit has yet to materialise, but Dalton said it was “… definitely coming”.

“My overall sense is that we will see a supply gap emerging in the next two to three years,” he said.

“They will have to pay higher prices than in the past, but I’m not sure if those prices will ever be export-parity,” said Dalton, referring to a development when it would make sense for Thungela Resources to supply the domestic market.

Anglo American produced 16.5 million tons from its South African coal assets during its 2020 financial year, a 7% year-on-year reduction, producing a $15m underlying EBITDA loss, and taking EBITDA losses over two years to $20m. Most of its production was to the export markets where prices have improved over the last year.

July Ndlovu, CEO of Thungela Resources, said that as an independent company the business would look at things “through a Thungela lens, not an Anglo lens”. The company has promised to pay out 30% of free cash flow after capital expenditure. If approved, the first dividend announcement was likely to be in early 2022.

Primary energy inflation has been a major problem for Eskom as it seeks to limit losses and deal with more than R450bn in debt.

Last month, Eskom was criticised for agreeing to a doubling in the price of coal supplied to it by South32, an Australian-headquartered company. South32 intends to sell its 92% stake in the coal business – South African Energy Coal (SAEC) – to Seriti Resources. The contract requires the support of the South African National Treasury.

South32 argued that without the adjustment to the coal contract the deal with Seriti would be dead in the water, and it would probably have to close SAEC.