South Africa has significant coal and manganese reserves and resources and is well positioned to supply the key regions of South East Asia and China, Mike Fraser, COO of South32 told delegates at the 2019 Joburg Indaba.
South32 is a global mining and metals company with operations in Australia, South America and Southern Africa – where it owns and operates manganese and coal mines and produce aluminium and manganese alloys.
However, Fraser said, in the near term, slowing global growth and ongoing trade and geopolitical tensions would weigh on commodity prices, with trade conflicts and trade policy presenting threats to demand for commodities in the near to medium term.
“The necessary response to climate change will also change demand for our products. Steel demand in China will start to decline. India and South East Asia are expected to support demand growth although at a lower rate. While coal will continue to play a significant part in South Africa’s energy mix given the existing infrastructure and new coal-fired capacity under development, we expect to see the seaborne market decline over time with increased competition from producer countries seeking to place product into the markets we have traditionally pursued.”
Fraser added that we have already seen some of these impacts reflected in the export coal price and export volumes out of South Africa. “These trends are likely to heighten global competition, requiring a collaborative approach with government and regulators to ensure the competitiveness of South Africa’s mining sector. But we continue to face a number of challenges in terms of community unrest and instability, social pressure, low productivity and power cost and availability that, if not managed, will detract from South Africa’s ability to attract investment.”
He said that the communities around mining operations rightly seek to benefit from having mining activity in the areas in which they reside and that South32 remained committed to developing initiatives that could help to uplift our local communities.
These included the creation of jobs for local people, developing small businesses and providing opportunities to supply the company’s mines, and investing in projects, like healthcare, education and housing, that benefit the whole community.
“With South Africa’s economic malaise and rising unemployment, mining communities are increasingly dependent on local operations and we continue to engage our communities to understand how else we can support them. In the last 12 months, we have seen an escalation in organised protests which are in the interest of a small number of individuals who ask us to breach standard commercial processes for their own benefit. We’ve also seen an increase in illegal mining activity. These activities are disruptive to our operations when they escalate to a point where they risk the safety of our people and the local community.
“While this has occurred at many mines across the country, it’s been a particular challenge for us in the communities around our Energy Coal business in Mpumalanga. The draft Integrated Resource Plan forecasts a decline in coal-fired power by 2030. Data released by the Minerals Council shows that the decline translates to an impact on over 2 000 direct jobs and approximately 9 000 jobs affected in downstream industries – so there is potential for unrest to become more frequent.”
He said that South 32 was aware that it has a responsibility to contribute to the economic stability and development in the regions around its mines. However, Fraser called for a continued and coordinated effort to manage the threat of organised protests and the prevention of illegal mining.
“An increase in the frequency of these specific actions will have a long-term impact on South Africa’s competitiveness and ability to attract investment. We have mechanisms for community engagement and for societal participation, and we remain committed to finding sustainable ways to build resilience to the economic challenges within our host communities.
“In Mpumalanga, our South Africa Energy Coal business is working together with other coal producers to address concerns raised by the communities and we have welcomed the support from the Department of Minerals and Energy in this process. We have also renewed our own commitment to enterprise supplier development. Our goal is to develop and empower small local businesses to be financially and operationally independent in line with our transformation strategy.”
In the 2019 financial year, South32 spent over R 150 million on the development of suppliers through its enterprise supplier development programs.
Reliable Power Supply for South Africa Remains a Challenge
An over-arching challenge to businesses of sizes in South Africa is, reliable and competitive power supply – which is critical to future industrial growth and creation of jobs, explained Fraser.
“Our Hillside aluminium smelter in Richards Bay is a major consumer of power and in the 2019 financial year we experienced the highest volume of load shedding since 2015. Load shedding forms part of our contractual agreement with Eskom and we plan for those events. While we have seen overall improvements in availability across Eskom’s generation fleet in recent times, our Hillside and Mozal smelters have continued to see load shedding events. As a result, load shedding has not occurred in communities in the same period, which demonstrates the role the smelters play in bringing grid stability.”
Continued improvements, added Fraser, woud be dependent on Eskom taking drastic action to address their financial and operational challenges. “Unbundling makes sense and can enable generation to be competitive; and coal procurement also needs to be improved to reduce costs. As a major supplier of coal to Eskom, we acknowledge the government’s request for suppliers to support cost reduction and will continue to work with them to manage their cost while ensuring our operations are sustainable.”
However, he said that South32 was of the belief that the best way to reduce the cost of coal is to transition back to long term contracts that would enable a reduction in the volume of coal delivered by road at higher cost, potentially with additional support provided by a smaller spot market for prompt volumes.
“Reinvesting in cost plus operations enables the lowest cost coal procurement with delivery by conveyor – removing the need for short term procurement from high cost producers. We recently announced that South32 is in exclusive negotiations with Seriti in respect of its offer to acquire our South Africa Energy Coal business.
“When we announced our intention to broaden ownership of South Africa Energy Coal in November 2017, our vision was that it should be a sustainable business for the long term and that it should become a South African black-owned and operated business, consistent with South Africa’s transformation agenda. We are also committed to defining a mechanism for communities and employees to share in the value generated by the business – in keeping with the spirit of the Mining Charter – which should positively impact the local economy.”
To establish South Africa Energy Coal as a sustainable business, the company will have invested R 8.7 billion of capital expenditure in the 2018, 2019 and 2020 financial years, while it progresses the divestment process.
This investment includes R4.3 billion to advance the Klipspruit Extension Project, which will extend the life of the colliery by at least 20 years.
“Beyond our ongoing investment in the business, additional investment will be required to sustain production and deliver on the potential of the resource base. South Africa Energy Coal is a large and complex business and plays a critical role as a major supplier of coal to Eskom. We fully understand the importance of ensuring continuity of supply over the long term.
“That’s why we have focused on identifying an owner with the necessary mining expertise and experience – as well as the financial backing – to ensure the business remains sustainable and continues to meet its contractual, social and labour plan, and rehabilitation commitments,” Fraser said.