In South Africa, the mining industry is the second largest electricity consumer after the manufacturing sector. Electricity is not only an integral input in any mining process but it is also critical in ensuring a safe
and healthy working environment in underground mines.

“Electricity powers mining equipment and the transportation of personnel and materials,” explains Frost & Sullivan metals & mining anlyst Wonder Nyanjowa. “It is also used to pump underground water as well as to provide ventilation and refrigeration in mines.”

Curtailing electricity consumption in the South African mining industry to 95% of normal consumption, combined with other operational problems, has reduced capacity in the mines to approximately 90%. Mineral production has declined whilst the health and safety of employees has been endangered.

To offer decision makers a perspective on the overall impact of the electricity supply crisis on South Africa’s mining industry, Frost & Sullivan will be hosting an online analyst briefing on Thursday 25 March 2010 at 2:00pm GMT/ 4:00pm CAT.

The discussion will benefit equipment manufacturers, industry executives, policy makers, and the investment services industry.

To participate in this briefing, please email Patrick Cairns at patrick.cairns@frost.com with the following information: your full name, company name, title, telephone number, e-mail, address, company website and country. Upon
receipt of the above information, a registration link will be e-mailed to you. You may also register to receive a recorded version of the briefing at anytime by submitting the aforementioned contact details.

The electricity crisis in South Africa has not only highlighted the importance of growing the country’s power generation capacity but also its ability to supply coal feedstock to power plants. Around 85 percent of electricity generated in South Africa is produced from coal fired stations, and this dependence is likely to continue for the foreseeable future.

While sectors across the South African economy are therefore viewing the electricity crisis as a significant challenge to business, global growth consulting company Frost & Sullivan believes that coal miners are faced with a huge opportunity.

“Coal mining companies have the opportunity to tap into this rising domestic demand for coal in order to grow their businesses,” says Frost & Sullivan metals & mining analyst Wonder Nyanjowa. “Exxaro Resources has already positioned itself well by signing contracts to supply 14 million tonnes of coal to Eskom’s Medupi power station. This is in addition to the 14.7 million tonnes that it supplies to the Matimba power station.”

The increased demand for coal is also likely to result in supply imbalances. While this will result in increased competition for the available coal, it could drive up prices. If production remains stagnant, exports are also likely to suffer as most of the available coal will be directed towards power generation activities.

However, coal mines will of course not be spared the difficulties brought about by Eskom’s supply constraints.

“The mining industry lost one week of production time in 2008 when Eskom could not guarantee the availability of adequate power,” Nyanjowa says. “The mining industry’s electricity consumption was curtailed at 95% of normal consumption in 2009, which, when combined with other operational problems that mining companies were facing, reduced capacity utilisation in the mines to levels around 90%.”

There is also a dire need to improve the manner in which coal is transported from the mines to the power stations. With coal reserves adjacent to certain plants decreasing, a great deal more coal is now being transported over long distances to each plant.

“It has become important for stakeholders in the coal industry to address the transportation challenges that are being experienced in moving coal from the mines to power generating plants.” Nyanjowa says. “The costs associated with this have risen enormously over the past couple of years.”

Nyanjowa believes it is therefore imperative for coal companies to develop new mines in close proximity to existing or new power stations.

“Exxaro is expanding the production capacity of its Grootegeluk mine in the Waterberg coal basin from 18 million tonnes per annum to 36 million tonnes in 2013,” he notes. “The bulk of this incremental production is targeted at Eskom’s Medupi power station.”

Local market intelligence firm Frost & Sullivan does not believe that the merger between Anglo American PLC and Xstrata will go ahead.

“Without delving much into the synergies that are likely to be realised from the complimentary businesses, such as coal and iron ore, my feeling is that it looks very unlikely that this proposed merger between Xstrata and Anglo American Corporation will be consummated. Anglo American Corporation has divested from gold to principally focus on platinum, diamonds and industrial metals. The group would want to grow the company in these sectors and maintain its unique identity and world class assets.

“It appears to me that Xstrata has long desired exposure in certain mineral groups like platinum and diamonds, where Anglo American Corporation has a strong presence. Xstrata’s hostile takeover bid for Lonmin in 2008 which would have provided exposure to platinum, fell through due to volatility in the commodities market and funding uncertainties. Their proposed merger is partly motivated by Xstrata’s desire to gain exposure to mineral groups such as platinum and diamonds, where they have little or no exposure at all.

“There will also be problems regarding valuation of assets, given the current uncertainties in global capital and commodities markets. Frost & Sullivan is also of the opinion that competition authorities, especially in South Africa, are unlikely to approve of the deal.”

An investment of between R90 billion and R110 billion is required to build 40 new coal mines to meet the projected growth in domestic and export demand for coal over the next decade in South Africa. Frost & Sullivan believes this investment will be crucial to ensure that the country’s energy needs are met.

“South Africa’s energy intensive economy is overwhelmingly dependent on coal,” explains Frost & Sullivan metals and mining analyst Wonder Nyanjowa. “This fossil fuel provides about 75% of the country’s primary energy needs, supports 90% of the electricity generated and provides feedstock for the country’s synthetic fuels manufacturing plants.”

Coal is also used directly as a fuel in the steel, cement and brick manufacturing industries. The limited availability of alternative energy sources and the apparent indecision regarding nuclear energy point towards coal’s continued domination of the country’s energy mix.
“However, the production and consumption of coal in South Africa have remained fairly unbalanced, with rising coal demand in one hand and constrained supply sources on the other,” Nyanjowa says. “This necessitates additional investment.”

Eskom is expanding its power generation capacity by building new power stations and returning into service three power plants that will increase its coal consumption needs by an additional 50 million tones per annum. The expansion of Sasol’s synthetic fuels manufacturing capacity would also see its coal consumption rising by an additional 25 million tones per annum.

“In other words, the domestic demand for coal is set to increase by 75 million tones per year over the next decade,” Nyanjowa notes. “Export demand for coal from China, India and the European Union is also forecasted to remain strong.”
The existing coal production capacity of the country can not sustain this growth. Since 2003, South Africa’s coal production has remained stagnant at levels around 240 million tones a year, only posting small incremental changes at best.

Depleted coal mines in the Witbank, Ermelo and Highveld coalfields in the Mpumalanga province, together with the operational and technological constraints that coal miners have been facing, account for the stagnation of coal production. Industry sources indicate that most of the existing coal mines in the Mpumalanga province will be exhausted by 2020, whilst two collieries in KwaZulu-Natal have already closed.

“Frost & Sullivan forecasts coal supply to remain flat in the short to medium term, owing to long lead periods between exploration and commissioning of new mines,” Nyanjowa says. “The Waterberg coalfield in the Limpopo Province hosts about 50% of the country’s coal reserves and it has one colliery operated by Exxaro Resources. Other coal miners such as Anglo Coal and BHP Billiton Energy are still prospecting in the area.”

The Waterberg coalfield already has 2 coal fired power stations attached to it and it represents the future of coal mining and electricity generation in the country. However, further developments will be needed to ensure that the drive to meet the country’s energy requirements are not constrained by an insufficient coal supply.

As the South African mineral and mining industry has expanded in recent years, the related mineral and mining chemicals markets have enjoyed steady growth. However, the global economic downturn has had a severe impact on mining activity, and this has in turn decreased the demand for chemicals in this sector.

New analysis from Frost & Sullivan (http://www.chemicals.frost.com), the growth partnership company, finds that the South Africa Mineral and Mining Chemicals Markets earned revenues of $592.7 million in 2008 and estimates this to reach $901.7 million in 2014. Explosives will continue to be the dominant product segment, while processing and water treatment chemicals will grow at a slower rate.

“The demand for explosives is set to continue driving the mineral and mining chemicals market in South Africa,” notes Frost & Sullivan chemicals programme manager Mani James. “Legislation requires mining companies to have safer processes embedded in their operating systems, boosting the uptake of mineral and mining chemicals.”

Bulk explosives and detonators are set to promote growth in the explosives market. Growth in these product segments is due to a shift in the use of less safe packaged explosives. The use of bulk explosives in open cast mining activities such as coal mining activities will support market expansion.

However, as mines look to save costs they will place pressure on manufacturers to lower their prices. The decline in demand for commodities will also have a direct impact on the demand for chemicals, forcing suppliers to compete more aggressively for market share.

“Chemical suppliers to mining companies tend to review contracts more regularly because of fluctuating prices,” explains James. “It is imperative that chemical suppliers adopt flexible and competitive pricing strategies to continue as preferred suppliers to mines.”

Moreover, due to the maturity of the market, the level of competition is high. Competition among suppliers is further heightened by the fact that customers are price sensitive and not particularly brand loyal.

Enhancing awareness among companies about environmental issues is a major factor that will influence the adoption of environmentally safe chemicals. The role of chemical suppliers in the safety processes of their customers is becoming increasingly important. Chemical suppliers can facilitate market share growth by assisting companies in complying with environmental regulations.

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