THE SOUTH AFRICAN COAL INDUSTRY: PART III -- PLANS AND

UNCLAS SECTION 01 OF 03 JOHANNESBURG 000338

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TAGS: EMIN ENGR ECON SENV SF
SUBJECT: THE SOUTH AFRICAN COAL INDUSTRY: PART III -- PLANS AND
FACTORS INFLUENCING COAL PRODUCTION

REF: A) JOHANNESBURG 335 B) JOHANNESBURG 337

JOHANNESBU 00000338 001.2 OF 003



1. (U) Introduction: This is the third of a four-part cable
dealing with coal and the important role it plays in the South
African economy. Part 3 provides information on some of the new
and expansion projects underway and planned clean-coal
developments. It reviews some of the policies and legislation
applicable to coal and looks at the major opportunities and
threats to the production and exports of South African coal.
Reftel A contains a summary for all four parts. End
Introduction.

Future Plans for Coal
--------------

2. (U) In light of Eskom's critical need to expand generation
capacity, the next five years should see four coal-fired plants
come on stream. Three plants with a total capacity of 3,540 MW
are currently being brought back into service and the fourth is
a 2,240 MW expansion to the 3,690 MW Matimba plant, located on
the Waterberg field. Kumba plans to double its coal output by
2010, including increasing output from its Grootegeluk mine by
6.3 million tons per year to feed the Matimba expansion. Plans
also include a new export coal mine of 10 million tons per year
(probably also located on the Waterberg field),to come on
stream in 10-12 years. Plans are linked to Kumba's
participation in the Richards Bay Coal Terminal (RBCT)
expansion, which would allow the company to increase exports to
3 million tons per year, and to the upgrading of the rail link
to the Grootegeluk mine.


3. (U) Kumba Resources has also concluded an agreement with the
Botswana Government to begin a pre-feasibility study for the
development of the Mmamabula coalfield. This is the western
extension of the Waterberg coalfield which hosts South Africa's
largest coal operation and the world's largest coal
beneficiation complex.


4. (U) Other coal companies intend expanding production to feed
planned new Eskom power plants. Rio Tinto is exploring the
coking and steam coal potential of the Limpopo coalfield, and a
number of projects are underway to provide export coal for the
RBCT expansion. The coal industry is confident that it can
supply an additional 30 to 40 million tons per year for export
and to meet the future needs of Eskom and Sasol. However, there
is concern that South Africa's rapidly diminishing reserves of
higher quality coal may not be able to sustain exports of 91
million tons per year for any length of time. Much reliance is
being placed on new BEE and smaller scale producers to fill the
production gap and on technology to upgrade coal for export.

Clean Coal Technology
--------------

5. (U) More stringent controls on all forms of coal pollution
are inevitable. Eskom's Executive Manager, Dr. Steve Lennon,
has stated that any new coal plants will have to be based on
state-of-the-art clean-coal technology and improve efficiency to
ensure that less CO2 is emitted per unit of production.
Established carbon capture and storage technology is not yet
economically viable and require about 40% of the energy produced
just to remove CO2. Major producers and users of coal,
including Anglo Coal, BHP-Billiton and Eskom, are participating
in the United States' FutureGen project. This project has as
its goal the development and construction of a coal-based power
plant that will produce near-zero emissions. A prototype plant
is planned to be operational by 2012. Experience from this will
be applied in South Africa.


6. (U) In the meantime, best-practice clean coal technologies,
processes and operations are being evaluated. Eskom is
operating an experimental in-situ underground coal gasification
project at the Majuba colliery and is investigating the
viabilities of coal-bed methane (CBM),fluidized bed combustion
(FBC),combined cycle gas turbine (CCGT) generation, pressurized
boilers and other developed and developing technologies. An
immediate goal for Eskom is the management of supply and demand
and the efficient use of electricity, which it claims will save
the construction of a 3,600 MW plant over a ten-year period.

Legislation and Policy
--------------

7. (U) Since the ANC-dominated government was elected in 1994 it
has enacted legislation aimed at transforming the South African
labor market and the public and private sectors. This includes
a host of general labor, equity, affirmative action and economic
empowerment legislation aimed at propelling historically
disadvantaged South Africans (HDSA) into the formal economy.
Specifically, provided for are improved working conditions;

JOHANNESBU 00000338 002.2 OF 003


upgrading skills; advantageous access to employment
opportunities; and participation at all levels in the economy.


8. (U) The minerals industry is South Africa's most important
economic sector and was the first targeted by the SAG for
transformation and empowerment. The government's aim was and is
to enable (initially through legislation) HDSA to play an
increasing role in all aspects of the minerals sector, from
which they were effectively excluded under apartheid
legislation. Transformation was to be accomplished through The
Mineral and Petroleum Resources Development Act (Minerals Act)
and its appendages, namely the Black Economic Empowerment (BEE)
Charter (Mining Charter) - both took effect in May and August,
respectively, of 2004. These were followed by a number of
bills, including the Royalty Bill and the Beneficiation Bill
that are still under consideration.


9. (U) The Liquid Fuels Charter (LFC) of 2000 was the first of
many industry sector charters. It covered the oil industry from
production and transportation to refining, retailing, skills
development and procurement. Its main tenet was for 25% of
equity and management control of all South African liquid fuel
entities to be in the hands of black economic empowerment
companies within 10 years (by 2010) and that the industry should
facilitate the financing of such deals. In addition, the LFC
required that a minimum of 25% of procurement expenditure be
earmarked for BEE suppliers. It also stipulated that BEE
investment should be broad-based and for the long-term; that
deals should take place at market value; that quality and
standards should not be compromised; and the BEE partners should
add value to the undertaking. (Comment: To date, many BEE deals
have not met these criteria. End Comment.)


10. (U) The LFC was followed by the Minerals Act and the Mining
Charter, both now in force, and the Royalty and Beneficiation
bills that are still to be finalized. The Act and Charter
require that 15% of a company's South African assets, as
measured by equity, production, management control or other, as
spelt out in a 'score card', must be in the hands of black
people by 2009 and that this be increased to 26% by 2014. The
industry was also tasked with facilitating financing of BEE
deals by up to $15 billion to 2009 and a similar amount to 2014.



11. (U) The most confrontational aspect of the legislation was
(initially) its focus on the transfer of mineral rights to state
custodianship. The current areas of contention are the Royalty
and Beneficiation bills. The early royalty discussion document
proposed a 2% assessment on gross revenues (rather than on
profits)for coal. The Benefication Bill is set to propose a
minimum level of product upgrading before export. If not
attained, the exporter could be required to pay some form of
export duty. At time of writing neither bill has been finalized
for public comment.


12. (U) Given that strategies to meet black empowerment targets
have been implemented by the major coal companies throughout the
past four years, the structure and productivity of the coal
industry have remained largely unchanged. Currently, nineteen
BEE coal companies have been allocated export entitlements
through the RBCT, own more than 20% of coal production and,
pending completion of BEE deals, Eyesizwe Coal could leap-frog
Anglo Coal to become the biggest producer of South African coal.


Opportunities for South African Coal
--------------

13. (U) Sustained high prices for export coal, up some 42% since
2003, and the continuing growth of the domestic economy, have
been good for all producers. Additional opportunities for coal
could come from increased tonnage requirements from Eskom for
its expanding coal-fired plants; increased coal exports to
Europe and the rapidly growing economies of the Far East; as
well as the possibility of additional coal-to-liquid (CTL)
plants in South Africa. Because of the significant advantages
of coal to the South African economy, the SAG has stated that
coal will continue its dominant role as an energy source for the
next four decades. This should provide industry stability and
the opportunity to research and develop other forms of energy
for transportation and to power industry.

Threats to South African Coal
--------------

14. (U) The expansion of coal exports will depend on a number of
factors outside the control of South African producers. Exports
to the EU countries, which accounted for 77% of total exports in

JOHANNESBU 00000338 003.2 OF 003


2005, will depend on Europe's resolve to reduce the use of coal
to combat climate change concerns versus cost considerations
should oil prices continue to escalate. Germany and Poland
remain heavily dependent on coal while Italy is converting some
oil-fired plants to coal and British Coal's plan to reopen a
colliery in South Yorkshire and to build a $1.5 billion power
plant equipped with technology to capture and store carbon
dioxide.


15. (U) A further threat to South African coal exports is the EU
Commission's proposed new regulatory framework for the
Registration, Evaluation and Authorization of Chemicals (REACH).
If implemented as is, the regulations would effectively embargo
the import of raw and processed products containing any form of
toxic or polluting elements, which could include coal. However,
given current concerns regarding energy supply security, it
seems that the EU will continue to use coal and is likely to
employ clean coal technology (CCT) to control emissions.


16. (U) Major competition to South African coal exports is
likely from Australia, Columbia and Indonesia, which produce
higher quality steam coals. Nuclear power plants are also a
competitive threat, given uranium's geographically-friendly
distribution - South Africa, Canada and Australia - and its
minimal emissions. However, the current general distrust of
anything nuclear could retard further development of nuclear
energy.


17. (U) While alternative and renewable energy forms may pose a
threat to coal (and other fossil fuels) in the future, mainly
for off-grid power and as a supplement to liquid fuels, the
South African focus is likely to be on developing clean coal
technology and on commercializing the mini-nuclear power Pebble
Bed Modular Reactor (PBMR),scheduled for production from 2013
onwards (a prototype has yet to be constructed).
LUOMA-OVERSTREET