Opinion: South Africa’s coal mining sector could shrink by 46%

Rob Jeffrey

In this opinion article, independent economic risk consultant Rob Jeffreyargues that the mining industry and coalindustry need to fight for their very future otherwise all is lost.

Few people realise that future economic, political and social prosperity are at currently stake. Decisions made in the near future will drastically affect the country for a generation, let alone a decade. It is necessary to examine recent economic trends in order to understand the extent of the county's problems and give guidance to on the decisions that need to be made.

THE NECESSITY TO REINDUSTRIALISE AND REDEVELOP THE MINING INDUSTRY
The past few decades have seen radical deindustrialisation of the economy. 

The mining sector has shown little or no growth for decades. Since 1986, the mining sector has fallen from representing about 13% of gross domestic product (GDP) to 7% of GDP, the secondary sector has fallen from 30% to approximately 21%. The tertiary sector has grown from 51% to 69% of GDP. 

The last seven years since 2008 have seen the situation worsen, with GDP growth falling to below 2%. Growth in mining and manufacturing has been negligible, while agricultural growth has averaged only 1% a year. Financialservices and personal service growth have averaged 2.4% and 2.8% a year respectively and government services 3.3% a year. The declines in these two sectors have resulted in serious structural economic problems.

The mining and manufacturing industries account for over 60% of the country's exports. Little wonder that South Africafaces a deficit on its balance of trade. These two industries and agriculture tend to employ proportionally fewer skilled workers.

Since 1995, the population has grown from 45-million to 56-million, but unemployment has grown from 3.7-million to 7.7-million. Since 2008, only half a million jobs have been created, almost all of which have been in the services sector, primarily in the public and government sectors. Unemployment is forecast to increase by over one-million by 2020. If ongoing, this is unsustainable. 

Quite correctly there have been calls from these major economic sectors to government to assist in creating growth in these sectors. The Energy Intensive Users Group of Southern Africa (EIUG) has called for urgent intervention to halt what it describes as the current “downward spiral” of a shrinking electricity sales base and increasing and unaffordable electricity tariffs. 

The EIUG represents 32 mostly mining and industrialcompanies accounting for more than 40% of the country’s electrical energy consumption and its appeal comes against the backdrop of Eskom’s latest application for a 19.9% tariff increase from April 1 next year. The mining industry is in decline. The Chamber of Mines has made clear its concerns. Policy is one major issue. 

There are some that believe the mining industry is past the point of no return. The issue is not just the decline. It is the loss of skills, intellectual capital, infrastructure and in particular organisational and planning ability at government level. It has been said that mining companies are turning to other countries that are more investor friendly and are open to ideas for development.

Apart from policy issues, in the future, one factor at the core of this reindustrialisation and redevelopment process is electricity. These industries are electricity intensive. If growth is to be restored, they require secure baseload electricity at competitive prices. Current plans being put forward by the Council for Scientific and Industrial Research (CSIR) and appearing in the draft Integrated Resource Plan 2016 will see a major decline in one important component of the miningsector, namely coal. This will have major ramifications throughout the economy and will detrimentally impact the very sectors that most urgently need to be developed. 

Unfortunately, the coal industry's fate is being determined by and based on three major, highly flawed arguments being used against it.

COAL AND MASSIVE POLLUTION
The first flawed argument is the view that coal-fired powerstations cause mass pollution. It is perfectly true that such power stations, and their associated mining operations, used to be massive pollutants of the air and their environment. However, over the years, Eskom has made enormous progress in reducing pollution. 

Particulate matter and emissions have been reduced 90% over 35 years. New High Efficiency Low Emissions (HELE) or ‘clean coal’ power stations will reduce pollutants further. As an example, the installation of flue-gas desulphurisation (FGD) at Kusile removes oxides of sulphur, such as sulphur dioxide. 

Not only that, but carbon dioxide (CO₂) emissions of HELE power stations are some 30% to 50% less than previous generation power stations. This puts them in a category close to gas power station emissions. In any event, CO₂ is not the environmental disaster the ideologists claim.

There is substantial research on this subject by world renowned experts supporting this view. They include Dr Patrick Moore, co-founder of Greenpeace and Dr James Lovelock, proposer of the Gaia Hypothesis.

Apart from the well-known Milankovic cycles, solar experts in Asia, the Middle East and parts of Europe believe it is the sun that is the major cause of climate change. According to Dr Neil Frank, former director of the US National Hurricane Centre, the centre has, over the past three-and-a-half years published over 400 papers that discredit CO₂ and support natural cycles of the sun.

Among many others, the conclusion of a landmark paper – entitled 'Emission budgets and pathways consistent with limiting warming to 1.5 °C', by Richard J Miller et al, in Nature Geoscience,  2017 – is that the computer models have overstated the impact of CO₂ on climate and that the planet is warming more slowly than predicted.

WIND POWER IS CHEAPER THAN COAL
The second blatant flawed argument is the myth that wind power is far cheaper than coal-fired power or nuclear power. This is totally dispelled by a recent Australian Research study by GHD and Solstice Development Services entitled 'HELE Power Station Cost and Efficiency Report', which estimated that with efficient construction and production, generation costs would be between 41.3c/kWh and 80.5c/kWh compared to Kusile estimates running at about R1.20/kWh and latest estimates for nuclear of R1.20/kWh. These domestic costs could clearly be substantially reduced. 

Furthermore, this price is for power generation over 80% of the time. It is, therefore, far cheaper than wind and solar at 65c/kWh but which generates power less predictably and for less than 35% of the time. A simple calculation shows that on a comparable basis, the equivalent price for power 80% of the time is a minimum of R1.48/kWh.

The CSIR has plans for high-penetration wind in South Africainvolving over 100 000 MW of wind energy capacity covering over 100 000 km² of land. Apart from the huge environmental damage, a report entitled ‘Critical Review of The Levelised Cost of Energy (LCOE) Metric’, by MD Sklar-Chik et al, in  the South African Journal of IndustrialEngineering, December 2016, concludes that “LCOE neglects certain key terms such as inflation, integration costs and system costs”.  They note, “Many international reports prove that such electricity supply is extremely expensive due to its variability, interruptibility, inefficiency and its requirement of 100% backup”. 

Full story at Mining Weekly.