SOUTH AFRICAN COAL INDUSTRY: COAL IN THE GLOBAL SETTING,

UNCLAS SECTION 01 OF 03 JOHANNESBURG 000335

SIPDIS

SIPDIS

STATE PLS PASS USAID, USGS
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND

E.O. 12958: N/A
TAGS: EMIN ENRG ECON SF
SUBJECT: SOUTH AFRICAN COAL INDUSTRY: COAL IN THE GLOBAL SETTING,
PART I

JOHANNESBU 00000335 001.2 OF 003



1. (U) Introduction: This is the first of a four-part cable
dealing with coal and the important role it plays in the South
African economy. Part 1 provides a background to coal, relative
to other energy sources, and South Africa's position in the
global coal market place. End Introduction.

SUMMARY
--------------

2. (U) South Africa has an experienced and efficient coal
industrial complex and export industry. Its assets include a
substantial infrastructure in place, large coal reserves and
resources, a domestic market for more than 70% of production,
and a solid reputation as a reliable exporter of consistently
good quality low sulfur coal. Coal makes a major contribution
to the country's economic and industrial development and has
enabled South Africa to become almost self-sufficient in energy.
Crude oil is imported and feeds four internationally-owned
refineries with a combined capacity of 510,000 barrels per day.


3. (U) Coal provides 25% of the country's liquid fuel needs via
the conversion of coal to liquid fuels, 92% of electricity
production, a proportion of steel's coking coal, and most of the
requirements of the metallurgical industry and domestic sectors.
Coal has enabled utility Eskom to provide the lowest cost
electricity in the world, with South African costs estimated to
be 36% less than the next cheapest producer Canada. This, in
turn, has allowed for the growth of world-class competitive
energy-intensive industries including smelters, refineries and
downstream manufacturers of base metals, synthetic fuels and
chemicals, steel, stainless steel, ferro-alloys, aluminum and
aluminum products, and titanium slag and dioxide powders.


4. (U) The outlook for growth in the coal sector is currently
very positive. The industry and the SAG are gearing up
production and infrastructure, respectively, to increase exports
to Europe, Africa and the Middle East by some twenty million
tons per year by 2012. Electricity utility Eskom is committed
to nearly doubling capacity by 2022, at an annual rate of
1,500-2,000 MW, most of which will come from coal-fired plants.
The oil-from-coal producer Sasol is under pressure to double
synfuel production and will shortly enter into negotiations with
the SAG on the issue. By 2015, the coal industry could be
called on to produce an additional 80 million to 100 million
tons of coal per year unless more use is made of nuclear,
natural gas and renewable energy sources. Given its dependence
on oil imports, the only viable alternative to coal for South
Africa appears to be nuclear energy. End Summary.

Introduction to Coal
--------------

5. (U) Coal has critically important uses that are fundamental
to human comfort and industrial activity - some 70% of global
steel production and 40% of electricity generation depend on
coal. Coal represents a concentrated source of energy that is
used in its raw state or upgraded and transformed into higher
value solids, liquids and gases that provide convenient energy,
fuel and carbon-based products. Methane gas (coal-bed methane
or CBM) is embedded in most coals and can in some instances be
tapped and used as a commercial energy source. Coal, unlike
oil, gas and most metallic mineral deposits, is abundant and
widely distributed. It is mined in over 50 countries and used
in significant quantities in over 70 countries.


6. (U) Burning coal, however, can have harmful health and
environmental impacts through the release of undesireable waste
products and trace elements. Some, such as ash, are relatively
inert and can be turned into a useful resource while others are
toxic to humans and animals and damaging to the environment.
"Best practice" methods and technologies can mitigate or
eliminate most of the "negative" by-products (at a cost),but an
economically viable and socially acceptable solution for the
capture and disposal of carbon dioxide gas (CO2) has yet to be
demonstrated. Carbon sequestration, though currently expensive,
has been tried with reasonable success in the Middle East and by
Norway's Statoil company which has pumped CO2 under the North
Sea bed since 1996.

Types of Coal
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7. (U) Coals are classified based on quality (rank),which is a
product of a number of factors including geological age and
depositional history. The highest rank coals, referred to as
hard or black coals, are the anthracites and bituminous coals.
Anthracite is relatively difficult to ignite but has specific
domestic and industrial uses and give off little smoke. The
bituminous coals include coking coals (for steel-making),
metallurgical coals (used in metallurgical and chemical plants),

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and thermal coals (used to generate electricity).


8. (U) Soft coals are of younger geological age and are
categorized as sub-bituminous (transitional between hard and
soft coals) and lignites or brown coals. They have higher water
and ash and lower heat contents. Soft coals are generally used
for electricity generation and space heating where higher rank
coals are not available. Finally, the earliest manifestation of
coal is peat. Peat is a loosely compacted biomass of very young
geological age and is an important fuel in many countries,
including Ireland and the former Soviet Union. South Africa
hosts predominantly hard coals, while hard and soft coals are
mined in the EU, North America and Oceania.

Global Coal
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9. (U) According to the 2006 BP Annual Energy Report, coal is
the world's fastest-growing energy source, driven by demand from
China. China consumes nearly 37% of the world's coal supply and
is currently also the biggest producer and consumer of coal.
Coal contributes 25% to the global primary energy mix and
generates 40% of global electricity. Fossil fuels (coal, oil
and gas) provide more than 80% of the world's commercial energy.



10. (U) Coal is the most abundant remaining source of fossil
fuel and accounts for about 64% of the total reserve, with oil
and gas accounting for about 18% each. The current high prices
of oil and gas, their relatively limited geographical
distribution and reserves, and threats to the security of Middle
East supply make coal an increasingly secure and attractive
option for energy and fuel - assuming that the issue of CO2
emissions can be economically resolved. A number of countries
with significant coal resources, including the United States,
China, India and Australia, are looking to apply South Africa's
coal-to-liquid (CTL) technology to supplement their oil
supplies.


11. (U) In 2005, global hard coal production reached 4,630
million tons with soft coal adding another 900 million tons.
Trade in hard coals was 755 million tons, of which seaborne
trade was 685 million tons. The global market for traded
thermal coal was 501 million tons, up 6% from 2004 and dominated
by supply from Indonesia (115 million tons) and Australia (113
million tons). Demand for thermal coal was dominated by the
Asia-Pacific region where Japan, Taiwan and South Korea together
imported over 200 million tons. The demand for coking coal
continued to increase and the global market is estimated at over
200 million tons per year. Global imports amounted to 840
million tons with EU taking 530 million tons, the America's 110
million tons and Asia 200 million tons.


12. (U) In 2005, the biggest private coal producers were:
Peabody Energy (US) 206 million tons; Rio Tinto (UK) 157 million
tons; BHP-Billiton (Australia) 119 million tons; Arch Coal (US)
112 million tons; Anglo American/Kumba (South Africa) 109
million tons; Siberian Coal Energy (Russia) 76 million tons; and
Xstrata (Swiss) 60 million tons. International thermal coal
trade was dominated by BHP-Billiton, Anglo American, Xstrata
(all sourced coal from their international and South African
operations),and PT Bumi Resources of Indonesia. Xstrata was
the largest thermal coal exporter with sales of some 45 million
tons, while BHP-B was the largest exporter of coking coal at 35
million tons.

South Africa's Position in the Thermal Coal Market
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13. (U) In 2005, South Africa ranked third in seaborne exports
of thermal coal, fourth in overall exports, fifth in production
and sixth in total reserves. Prior to 2001, South Africa was
the world's second largest exporter but was overtaken by both
Indonesia and China. Columbia has plans to significantly
increase its share of the export market.


14. (U) In 2005, hard coal production and exports in millions of
tons (Mt) and reserves in billions of tons (Bt) were:

Production Exports Reserves
Mt % Rank Mt % Rank Bt % Rank
China 1,965 42 1 87 12 3 62 13 3
USA 933 20 2 43 6 7 111 23 1
India 373 8 3 2