Investors are increasingly viewing coal as a safe bet due to the current crisis in the Middle East. South Africa has the sixth-largest identified coal deposits in the world.
With new technologies, producing oil from coal becomes economically viable when oil is over $40 a barrel. Considering that oil is currently trading at more than $74 a barrel, the conversion process becomes a profitable venture.
Several factors are combining to make coal an attractive investment.
There is a strong demand for coal worldwide and, once again, China is the driving force. Although China is not a major export market for South African coal, the country is sourcing more coal from its neighbours, such as Indonesia and Australia. This is allowing South African exporters to pick up the slack in the European market. In addition, Europe is diversifying its energy, and with new coal cleaning techniques and cleaner coal burning technologies, coal-fired powered stations are losing their dirty image.
Also with a growing energy deficit within the country, there is an increasing demand for coal in the domestic market. The government is investing $12.1bn in the state energy giant Eskom over the next five years in a bid to increase capacity to a level where it can keep pace with the country's economic expansion. Eskom also has three mothballed coal-fired stations, with a potential capacity of 3800 MW. South Africa is therefore endowed with an abundance of an easily accessible resource that is rand denominated and thus not vulnerable to currency fluctuations.
However, the momentum behind international coal prices will come from Washington. There is growing pressure on Capitol Hill to cut dependence on Middle Eastern oil and coal to liquid (CTL) is increasingly being seen as a viable alternative. As the US has the largest deposits of coal in the world, and due to the increasing prices at the pumps, lawmakers and industry are taking a closer look at the technology.
The hype surrounding CTL, combined with increasing demand in Europe and China, pushed coal up to $62.55 a tonne in London last week, with the price hitting a 10-month high of $66.83 in March. Prices paid by US utilities are also expected to climb 5% in the next year and double by 2021.
Energy security is ironically the reason South Africa is leading the way in synthetic fuel technologies. Faced with economic embargoes in the 1980s, South Africa's then National Party government sought to improve its own energy security through the conversion of its abundant coal reserves into transportation fuels.
CTL is achieved by first converting coal into gas. Then, the gas is put through a Fischer-Tropsch synthesis reaction, which produces synthetic crude oil. This crude is then refined to produce a high-quality synthetic transportation fuel. To date, South African energy corporation Sasol has produced more than 1.5bn barrels of synthetic crude. Today, roughly 28% of South Africa's liquid fuel needs are met through the production of synthetic fuels.
South African energy companies are in a prime position to take advantage of the upswing in demand for these technologies. However, from the investor perspective, the price of coal remains a tricky commodity to gauge because there is so much of it. Gavin Keeton, senior vice president at Anglo American, told OBG that the price was determined by how quickly supply comes on line.
"Historically, what has happened in the past is that when new mines come on stream the price has collapsed," he said. "There is lots of coal, even China has lots of coal, and so I think it's not surprising that we saw the price of coal fall last year because very quickly the industry was able to bring brown fields sites on line."
As high oil costs are likely to increase further in the years to come, South Africa has the opportunity to expand on its ability to convert coal to oil and reap the rewards from its lucrative asset.