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 -------------- ¶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), JOHANNESBU 00000335 002.2 OF 003 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 -------------- ¶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 -------------- -------------- ¶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