Eskom Coal Supply and the Role of Emerging Miners. May 2015

Transcription

1 Eskom Coal Supply and the Role of Emerging Miners May 2015

2 Eskom historically utilised 2 coal contract types, with an increase in shorter-term contracts in the last 10 years Cost Plus Fixed-price Long Term Fixed-price Short/ Medium Term Cost Plus Long Term Contracts Fixed-price Long Term Contracts Fixed-price Short-Medium Term Contracts Description In place for mines that are situated close to Eskom s power stations with all coal production dedicated to Eskom The coal price is based on mining costs plus an agreed profit consisting of management fees and a return on capital originally invested These contracts deliver coal to Eskom at a fixed price that is annually escalated according to an agreed composite escalation index Supply to Eskom, export market and other local markets Utilised to fill the remaining coal requirement that cannot be supplied by the cost-plus and fixed price contracts The short-medium term mines tend to have inherently higher cost structures which relates to higher coal costs Advantages Historically lowest R/t cost Transparency into mine operations and ability to influence Easiest long term negotiations, simplified and expedited financing Predictable prices Less price and quality variation risk exposure than Cost Plus Fast and easy to negotiate Predictable prices Flexibility through short contract durations and road and rail deliveries Disadvanta ges Eskom carries almost all risk Mine has limited incentive to optimise operations Eskom provides initial and sustaining capital expenditure Prices can be high if Eskom has limited alternative options Dependent on global market demand, price and export volumes Substantial price premium for mining marginal deposits and for the miner s higher risk exposure Considerable contract management resources required Volume Trend ( ) Coal Purchases(Mt) Source: PED Internal analysis F2000 F2001 F2002 F2003 F2004 F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013 F2014 F2015 2

3 Eskom s life of station coal supply plan contains over two billion tons of un-contracted coal from 2020 onwards Coal demand, Mtpa Total uncommitted requirement of ~40Mtpa as early as 2018 Unidentified Un-contracted Includes only Eskom requirements Based on a 50 year operational lifespan Only 5 stations still in operation after 2040: Contracted Contracted Key Message Coal supply to 2018 is contracted to an acceptable degree (with exception of Kusile), thereafter asignificant proportion of coal is not contracted. Also planned operational lifespan increases to between 50 and 60 years will compound the problem. Source: 2012 McCloskey Coal Conference 3

4 Export Price and Coal Grades 4

5 Coal Export price trend at Richards Bay Coal Terminal in US dollars Shortage of coal supply to Eskom Source: Argus Media, Macquarie Research 5

6 Segmentation of the SA coal market, with Eskom needing higher quality and India prepared to take lower quality Volume Mt, 2009/ Eskom Eskom Sasol Kelvin PS Industrial boilers Municipalities e.g., hospitals India India Brick and tile Agriculture Export Cement Mining Calorific value GJ/ton Eskom controlled Competitive Export RB3, the lower quality coal grade (~5,500kcal/kg, ~23MJ/kg) has been legitimised in recent months signifying that RB3 is a tradable commodity. RB3 competes directly with Eskom s coal requirements Coal Brokerage global COAL updated its Standard Coal Trading Agreement (SCoTA) in March 2012 to a new trading contract for Richards Bay (5,500 kcal/kg NAR; total moisture 14%; maximum ash 23% and 1% sulphur on as-received basis) Source: McKinsey Analysis 6

7 Eskom s Current Coal Requirements 7 7

8 Eskom has to secure 2.17 billion tonnes of coal up to 2051, ~1.05 billion is still to be contracted Eskom Long Term Coal Supply (Projected) Mtpa Source: Internal analysis Long Term Supply Long Term supply includes the life extensions of all our existing long term contracts and the New Largo agreement for Kusile The estimated saleable coal from these sources is ~1.12 billion tonnes Medium Term Supply ~1.05 billion tonnes (average 11Mtpa from FY2018 onwards), will be sourced from new coal supply agreements and provides an opportunity for emerging miners Potential for Waterberg supply in the future in addition to the Mpumalanga region. Contracted/Recently Secured For the next 5-years Eskom is 80% contracted and the remaining FY16 and FY17 shortfall will be secured soon. For the foreseeable future Eskom is fully contracted at Lethabo, Matimba, Medupi, Kendal, Duvha, Matla and Tutuka. Source: Internal analysis 8

9 Eskom Coal Requirements: Qualities Indicative Coal Quality requirement ranges (MJ/kg, Air Dried) Note: Based on 240 specifications 9 9

10 Market Factors 10 10

11 Export capacity of existing coal mines Seaborne Thermal Growth ( ) (Million tonnes) Export capacity of existing South African mines (Million tonnes) Comments No new export mines have been announced since 2012 and the only sustaining project was at Glencore s Tweefontein Colliery The global coal industry is reducing its focus on thermal coal, driven by thermal coal assets have delivered anemic returns in recent years and a material recovery in prices over forthcoming periods is not anticipated. In the medium term companies will continue to constrain capital expenditure Eskom believes that the lack of investment in new mining capacity over the last few of years and the time it takes to establish a new coal mine will force Eskom to start purchasing a proportion of its coal requirement at prices that competes with export opportunities, i.e. at export parity prices. Lack of investment will result in a decline from 2018 onwards Export coal prices were around US$95 per tonne 24 months ago, but dropped below US$75 per tonne by July 2013 and to US$62 per tonne in recent weeks, recovering only to US$65 on the second week of May Source: Wood Mackenzie 11

12 Imports into India will increasing rapidly 12

13 Thank you

14 Eskom coal quality requirements Parameter Typical Eskom Ranges Impact of out of spec coal Actions to improve/ manage qualities Calorific Value (CV) MJ/kg - Low CV coal means that more coal must be burned to produce the same electricity - In extreme cases, the power station will not be able to burn low CV coal - Coal can be washed to float off lower CV coal, the miner can try to mine only the higher CV coal seams, or low CV coal can be blended with high CV coal - The power station furnace can be designed to use low CV coal; however, once built, the required CV cannot be changed Volatiles 20 26% - Coal will not ignite in the furnace if the volatiles are too low - Excessive volatile are a safety hazard Ash 22 41% - High ash coal has less energy, increases the ash disposal requirements and can clog up and erode key power station equipment - Limited actions possible must source the correct coal - Ash can be removed by washing of the coal - Equipping the station to handle higher ash coal is possible, but generally expensive Abrasive Index (AI) mg/fe - High AI coal will cause wear and erosion of power station equipment - AI can be reduced by selective mining and/or washing - To handle high AI coal, the power station must increase its frequency of maintenance, which reduces the time available for producing electricity Sulphur <1% - Sulphur results in air pollution, which can exceed permissible levels - Washing can reduce sulphur levels - The power station can install expensive filtering equipment to remove the sulphur dioxide Moisture % - Higher coal moisture affects efficiency of the boiler Source: PED - Compact stockpiles to remove water and allow drying time 14