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New trading platform to introduce transparent domestic coal indices from 2020

Anew online commodities trading platform will be launched during the first quarter of 2020, potentially heralding a new era of transparency in the pricing and procurement of domestic coal, the rising cost of which has become a major source of concern for both Eskom and government.

Coal remains the dominant primary-energy source for the production of electricity in South Africa and even with high allocations for renewable energy in the latest Integrated Resource Plan, IRP2019, as well as the prospect of coal-plant decommissioning over the coming ten years, coal is still expected to contribute 59% of South Africa’s energy volumes by 2030.

Mineral Resources and Energy Minister Gwede Mantashe has indicated that he wants suppliers of coal to Eskom to accept a price cap, based on an index price. He insists that government has no intention of imposing the cap unilaterally, but argues that coal prices are too high and that a new price formula is required.

African Source Markets CEO Bevan Jones tells Engineering News Online that the intention of the platform is to create a domestic coal market with transparent coal indices covering five grades of Mpumalanga coal.

The highest grade would be equivalent to export-quality coal, also known as Richards Bay 1 (RB1), with a calorific value of 6 000 kcal/kg. Jones co-founded globalCOAL, the world’s leading online coal trading platform, that developed the RB1 standard in 2001, as well as the Standard Coal Trading Agreement, or SCoTA, that almost all coal contracts are based on.

The second grade for which an index will be created is coal with a calorific value of 5 500 kcal/kg, equivalent to RB3, or the grade of coal typically exported from South Africa to India. The other three grades will be coal with calorific values of 5 150 kcal/kg, 4 800 kcal/kg and 4 500 kcal/kg, which covers the types of low grades generally consumed at Eskom power stations, although discussions are continuing with market members to finalise these.

The indices, Jones says, will introduce a far higher degree of transparency over domestic coal prices, currently arrived at through behind-closed-doors bilateral negotiations between Eskom and coal miners.

In addition, they will add greater coal-procurement flexibility, as the State-owned utility will be able to source opportunistically in the spot market and use the forward-market visibility created by the platform to lower the risk of medium-term contracts.

Eskom’s current coal strategy, by contrast, is to return to the long-term cost-plus arrangements eschewed during Brian Molefe’s controversial tenure as CEO. Molefe had a “buy the bread, not the bakery” strategy that became synonymous with State capture at the utility, as it was used to facilitate the entry of the Gupta-family into Eskom’s coal supply chain.

Jones says that while the strategy was dubious in 2016 when export coal prices approached $100/t, it may make increasing sense in a context of power-station decommissioning and global demand destruction, which is resulting in structurally lower prices over the longer term. Coal is currently trading at around $67/t.

That said, he expects long-term contracts to remain a major feature of the Eskom procurement model, especially where mines are in close proximity to power stations. Nevertheless, he believes the utility should exercise caution before over committing to additional cost-plus arrangements in light of the global move away from coal, which is likely to improve conditions for buyers in the years ahead.

Already, a quality adjusted export netback price, which most miners consider before selling to Eskom, is lower than some recent medium-term purchases based on cost-plus a fair return for miners. Given that an Eskom coal contract usually only goes up in price due to annual escalations, market-related prices could become a lot lower than Eskom’s cost-plus contracts in the next five years.


The power utility could capitalise on the trend and de-risk its coal strategy by maintaining some exposure to domestic spot prices, which will rise and fall in sync with global supply and demand.

“Either way, it makes sense for Eskom to increase its toolbox of procurement options, from cost-plus, to competitive coal tenders, to fixed price forwards, to spot trades and index-linked contracts. Indices add significant flexibility and optionality at a time when global coal demand destruction is likely to continue apace,” Jones says.

“Instead of locking into fixed-price agreements that run for 20 years, most utilities globally simply buy their long-term coal on the index price, which guarantees that they will always be buying at the market price, even though they don’t know what the index price will be in ten-year’s time.”

Should Eskom sustain its current contracting strategy, there is even a risk that it will become a source of subsidy for the miners. Such a scenario could arise when miners face the choice of either chasing lower washing yields for what used to be a higher export price, or contracting with Eskom at higher yields and with the utility paying more on a quality-adjusted basis.

A robust domestic coal market will also be helpful for coal miners, especially emerging empowered juniors that have product that the majors require. “Miners are currently buying in coal to meet their Transnet Freight Rail (TFR) and Richards Bay Coal Terminal (RBCT) take-or-pay commitments. The market will also level the playing field and take out rent-seeking middlemen, giving both miners and consumers a better price.”

Should Eskom decide to procure some coal on an index, then TFR could also link its price for railing coal to RBCT to the same index, ensuring that Eskom and TFR have opposite price exposures.

“As both are owned by government, the two State-owned enterprises could simply agree a financial swap between them, at say R300/t for the about 75-million tons of coal TFR rails yearly. Thus, any physical coal price exposure is eliminated, because what the one loses the other gains and they simply settle the difference financially between themselves.”

Jones also stresses that the platform will not be limited to coal and will include indices for diesel, biomass, gas, chrome and manganese. “We are aiming to go live in the first quarter of 2020.”
Source: Mining Weekly

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