Coal in Vogue

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South Africa's coal industry is booming, with prices at near record highs, increasing demand driven by rising international oil prices, greater use of coal-fired power stations and a growing interest in coal derivatives.



As of the end of June, free on board prices for coal being loaded at the Richards Bay Export Terminal were in the region of $200 a tonne, more than three times the $60 a tonne price from May 2007.



To meet rising international demand, the government aims to expand the shipping capacity of the Richards Bay terminal, South Africa's main coal exporting port, by a further 20m tonnes, up from the present maximum of 73m a year. The $128m expansion, expected to be finalised by the first half of 2009, will include upgrades of rail links and loading capacity at the port.



Thanks to the rising demand for coal, fields that were considered marginal are now being earmarked for development. On June 30, Miranda Minerals announced it would partner with Nava Resources to explore and possibly develop a new mine at Ermelo, Mpumalanga province. Though other companies had sunk test bores in the region in the past, excavation had not been undertaken as market conditions were unsuitable at the time.



The rising price of oil has also prompted South Africa's petrochemical group Sasol to resurrect its multi-billion dollar coal to oil refinery. Project Mafutha is slated to have an 80,000-barrel-per-day (bpd) production capacity. In April 2007, it was widely reported in local and international media that Sasol considered shelving the project. Now, Project Mafutha is back on the agenda after the government's announcement last August that it would not impose a windfall tax on Sasol's profits, and the near doubling of oil prices from early 2007.



Lean Strauss, the group general manager, confirmed that the project would go ahead, though it was still in its early stages. "We're going to do our planning properly before we start construction," he told international media on July 2.



If Project Mafutha does get off the ground, it will bring Sasol's total domestic coal oil capacity to 230,000 bpd, building on the 150,000 bpd output of its Secunda refinery.



The positive outlook for South Africa's coal industry has been tempered by deficiencies in the country's transport network. State controlled transport and logistics group Transnet, which operated South Africa's rail network, has been blamed by the mining industry for slowing the flow of coal exports. In particular, delays in rail services, due to derailments, cable theft and power cuts are said to have restricted shipments.



Transnet took flak after it released figures on June 30 showing shipments on its line from the Mpumalanga coalfields to Richards Bay had fallen by 5.2% in 2007-2008. Chris Wells, Transnet's chief financial officer, argued that a lack of production from the mines was equally to blame for shortages at export points, along with the company's operational issues. To reduce delays and improve services, Transnet is to spend $4.8bn in the next five years on expanding the coal and iron ore rail lines and related infrastructure.



However, Transnet's plan to upgrade its lines allows for freighting capacity of only 78-81m tonnes a year, far below the 92m tonnes the industry is looking to ship out of Richards Bay, according to South African media.



Another issue facing the industry is the effect of domestic versus international demand. In late May, state electricity producer Eskom warned that coal supplies were threatened by having to compete with the export market. With Eskom relying on local coal to generate 90% of its power output, the company was concerned that suppliers might renege on long-standing contracts at set prices to pursue more lucrative sales overseas.



With estimated reserves of 53bn tonnes, South Africa's mining is well placed to meet the growing demand for coal, as long as it can guarantee its product can be shipped in sufficient quantities.

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