EXXARO Resources churned profits and dividends in the six months to end-June but that was thanks to its non-managed iron ore investments because its core coal business was hammered by Transnet Freight Rail’s (TFR’s) disastrous performance on the coal export line to Richard’s Bay.
Coal export sales plunged 30% to 4.1 million tons (Mt) in the six months to end-June (six months to end-June 2020: 5.9Mt). That’s worse than was predicted in March by Exxaro CEO-elect Nombasa Tsengwa who warned that some two million tons of coal exports were “at risk” for all of 2021 because of TFR’s poor performance.
Tsengwa today told Miningmx that the “at risk” figure on Exxaro’s forecast coal exports for 2021 had been increased to three million tons.
Exxaro CEO, Mxolisi Mgojo revealed that, in total, South African coal exporters had lost some nine million tons of exports during the first half of 2021 which he described as “one of the worst export rail performances for the industry”.
That means that TFR managed to deliver on average 1.5Mt of coal per month less in the first half of 2021 than it was supposed to.
That’s equivalent to 12.8% of the 70.2Mt that the Richards Bay Coal Terminal (RBCT) exported for the whole of 2020 and makes a mockery of the hopelessly optimistic prediction made by RBCT management in January that the terminal would export 77Mt this year because of “the available capacity of TFR to rail the coal”.
Mgojo attributed the lost exports to a “lack of export rail capacity from TFR” caused by “… locomotive unavailability, coal line shutdown disruptions, derailments, and other operational challenges combined with vandalism and sabotage of rail infrastructure and rampant cable theft”.
Coal price surge
Exxaro was saved from the full financial impact of these lower export volumes by the surge in coal prices with the average benchmark API4 (all publications index 4) jumping 47% to $98/t ($66/t) resulting in a 50% increase in the average realised export price of $78/t ($52/t).
The end result was that Exxaro’s net operating profit dropped 25% to R3bn (R4.1bn). However, the group still posted a 55% hike in profit before tax to R9.3bn (R6bn) thanks to a near-trebling of the income received from iron ore producer Kumba Iron Ore (via Sishen Iron Ore Company) to R6.3bn (R2.2bn).
Iron ore prices doubled to $184/t ($91.7/t) and Mgojo expects the tight market conditions to continue during the second half of 2021 commenting that “… strong steel mill profitability, ongoing stimulus and multi-year highs on leading indicators such as PMI reinforce the likelihood of further acceleration in steel production and iron ore demand”.
Turning to coal, Mgojo expects that both the seaborne and domestic thermal markets will remain “stable to strong” in the second half of 2021 as strong thermal demand from the northern hemisphere together with the slow recovery of both seaborne and China domestic supply will support the seaborne price.
Ironically, he adds that “… with the continued poor domestic and export rail performance and the recent civil unrest being experienced in South Africa the API4 index has increased on the expectation of medium-term constrained coal supply from South Africa”.