Power-price increases may be double-edged sword for coal industry

Increases in electricity prices charged by South Africa's power generator, Eskom, are likely to prove a double-edged sword for the country's coal industry, according to a leading analyst.

The energy regulator, Nersa, granted Eskom the right to put up prices by 13.3% from July 1 to help pay for its ZAR 350 billion ($44 billion) capital spending plans to meet surging demand. The power generator was authorized a 14.2% increase in rates on April 1 and wanted a 53% hike in its latest application.

The mining sector, a major user of electricity for its operations, would face higher costs as a result of Eskom's new charges. However, increased revenues at Eskom is likely to boost demand and prices of low quality steam coal produced by South African mines, said Xavier Prevost, a senior coal analyst with Wood Mackenzie.

"Now all cheap coal, that used to be the stuff mines used just to keep them afloat, is becoming so pricey that you can just run a mine on that and forget about exports! Although, if you can, it's always good to be able to have some of the export-quality output, especially now that the prices are so brilliant and are deemed to become even better," he said.

"On the other hand, the mines' costs are going to escalate, but not only because of electricity. At the moment all costs are increasing, including fuel and mine materials, so I expect mines to have a big cost escalation, but that will be compensated by the very high revenue that coal mines will earn. To put it simply, coal prices are the driving force behind the higher electricity prices, so the mines will pay more, but get much more."

The Chamber of Mines claimed that the Eskom price rises would load ZAR 1.6 billion onto mine costs.

Created: June 27, 2008

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