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IEEFA op-ed: South African coal exports face decline as renewables pick up pace across export markets

September 23, 2019
Simon Nicholas

Whilst South Africa grapples with domestic power and coal issues the government would do well keeping one eye on the overseas markets for the nation’s coal exports.

In the longer term, South Africa’s coal exports will go into decline as overseas demand for the product fades, and without intervention to support coal areas in managing the transition, will result in significant social and economic consequences.

The energy transition will happen whether policy makers want it to or not

The coming global decline in coal demand is part of a transition towards renewable energy that is already well underway. At its heart, it is a technology transition and is hence unavoidable – it will happen whether policy makers want it to or not.

As such, policy makers in South Africa need to plan for this long term decline. An unplanned, chaotic transition will have far more serious impacts than one that has been prepared for.

As tends to happen in technological transitions, new technology will replace the old at a rate faster than most predict.

According to Bloomberg New Energy Finance (BNEF), two-thirds of the world’s population already live in countries where wind or solar (or both) are the cheapest source of new power generation. By 2030, new wind and solar will be cheaper than running existing coal- or gas-fired plants virtually everywhere. This is already the case in India.

This is particularly meaningful for South Africa as it is so dependent on India as a coal export destination. In 2018, 48% of all South African exports out of Richards Bay Coal Terminal (RBCT) went to India, a nation with a clearly stated policy aim to reduce reliance on coal imports. In the first half of 2019, that rose to 60%.

Other major thermal coal exporters are less dependent on one nation; in 2018, 31% of Indonesian exports went to China, and 27% to India, whilst Australia’s biggest destination was Japan with 39%.

Reductions in India’s imports will have significant impact on coal export markets

Given South Africa and Indonesia are so reliant on India, any reduction in the latter’s coal imports would have significant repercussions across the seaborne thermal coal market.

The Indian government’s latest plan is to cut coal imports by one third, or around 85Mt, by 2024.

In addition, state-owned Coal India Ltd is again talking about ramping up domestic coal production to reduce imports. Although Coal India has tended to miss its production growth targets, its output is still growing and is planned to grow much further.

Don’t expect other markets to save South Africa’s coal exports either.

Export growth to Pakistan is limited, with most of the power plants that run on imported coal already built and a significantly stepped-up renewable energy policy has been drafted.

South Korea has a clearly stated intention to reduce reliance on coal whilst Europe is further down that track than anyone. IEEFA expects government statements announcing a planned end to coal-fired power in some European countries will be joined by others from around the world in near-future.

South Africa’s hand will be further weakened by the fact that other exporters will be losing their major markets at the same time.

In addition to India, Indonesian exporters are faced with the prospect of declining exports to China as it too aims to replace imported coal with domestic production. Some of the slack may be taken up by higher domestic coal demand in Indonesia but the market looks like it will extend its over-supply situation into the longer term.

Meanwhile, Australian exporters will see Japanese demand fall even if the Japanese government takes no further action to reduce reliance on coal.

Over-supplied coal exporters will compete more fiercely over declining markets

The result of this will be over-supplied coal exporters competing more fiercely over declining export markets.

South Africa’s main export terminal, RBCT, is already operating with 20% spare capacity as rail capacity hasn’t matched the terminal’s 91 million tonne per annum export capacity.

In the longer term, RBCT may have to get used to the idea that an increasing proportion of its annual capacity will become stranded.

RBCT is not alone in this. The coal terminals at the Port of Newcastle in Australia – the world’s largest coal export port – operated at 25% spare capacity in 2018.

Concern over coal’s long-term sustainability has led the chairman of the Port of Newcastle to recognise an “urgent need” for the port to diversify away from a reliance on coal, further stating, “While the world’s demand for our coal is beyond our control, our ability to invest in new sources of growth and innovation is not.”

Part of that statement was echoed by RBCT chair Nosipho Siwisa-Damasane upon the release of reduced 2018 export figures, who stated, “The markets are a reality, they are outside RBCT’s control”.

In the long term, South African coal export levels will be decided by markets that reflect energy policies across Asia, not those of South Africa. The economic benefits of renewable energy are increasingly influencing Asian energy policies. Concern about climate risk and air pollution will only drive the change faster.

Policymakers need to spend time and effort now to prepare for the inevitable transition.

This commentary first appeared in Business Day.

Simon Nicholas is an energy finance analyst with the Institute for Energy Economics and Financial Analysis (IEEFA).

Related links:

IEEFA report: Transition planning a must as South Africa’s export markets pivot away from thermal coal

IEEFA update: South African coal exports face long-term decline

IEEFA update: Smart countries adapt to finance industry’s exodus from coal

Simon Nicholas

Simon Nicholas is IEEFA’s Lead Analyst for the global steel sector, as well as Asian seaborne thermal and coking coal markets.

Simon’s focus is on the energy transition, the long-term outlooks for coal and steel as well as the need for emerging nations to establish financially sustainable power systems to support their development.

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