Coal prices may fuel power costs

2013-03-10 10:00

The Competition Tribunal believes electricity prices could skyrocket above expected hikes from Eskom, if coalprices in the domestic market increase as expected.

This was contained in the Competition Tribunal’s Reasons for Decision document released this week, which relates to the approval of the Glencore-Xstrata merger.

Under the title “Non merger-specific broad public-interest concerns” the tribunal identified a number of factors that do not favour domestic coal

users such as Eskom, which generates 90% of its electricity from coal.

Other factors identified included the impending end of some of Eskom’s long-term coal contracts, Eskom’s increased demand for coal, the rise in volume of short-term coal contracts used by Eskom, increasing rail capacity to transport coal exports, high coal-export prices becoming attractive to domestic coal-mining operations and the

trend of domestic coalprices rising towards an import-parity price.

“These trends do not favour domestic coal users, specifically Eskom as the largest customer in South Africa,” said the tribunal’s document.

“However, these developments are occurring separate from the proposed merger.”

“These factors will no doubt have an impact on Eskom’s ability to procure coal, the price thereof and to produce competitively priced electricity,” the document continued.

The tribunal said the rise in coalprices was a “serious concern” and pointed out that it could have “detrimental effects” on economic growth in the country and South Africa’s development goals.

“These concerns, which are industry-wide, could be addressed by other policy instruments, if government deems it appropriate, and if government was to ensure that the strategic importance of South Africa’s coal reserves to domestic industries is protected,” reads the document.

The tribunal called on the Competition Commission to use its advocacy role to engage with stakeholders and policy makers to advise them on these public-interest concerns.

Eskom has budgeted for a 10% increase in coalprices over the next five years and it is expected to spend more than R293?billion in the next five years on primary energy sources.

Initially, Eskom had approached the tribunal to intervene in the merger, citing concerns about post-merger supply of coal.

Eskom stated that it would be advantageous if certain coal-supply-related undertakings could be obtained from the merging parties.

Eskom’s factual witness, Kiren Maharaj, told the tribunal that the parastatal’s concerns were that Xstrata will adopt a less favourable pricing strategy towards its negotiations with Eskom around coal supply.

Eskom was pushing for conditions to be attached to the merger decision that would maintain the current ratio of coal supplied to it over coal exports, secure it new supply contracts and ensure that export-parity pricing is not applied to domestic coalprices.

Exxaro this week announced its annual results for the year that ended on December 31 last year.

It stated that there were challenging trading conditions for coal in 2012 with average export prices dropping from $105 a ton in January to a low of $85 a ton in November.

“A general decline in export volumes was also experienced during the year,” said Exxaro’s statement.

“Exxaro realised an average export price of $94 a ton in 2012, compared to $118 a ton in 2011. Production earmarked for export was successfully redirected into the domestic steam market where opportunity arose.”

This was on the back of weakened global demand.

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