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Who will blink first in Anglo-Eskom energy coal standoff?

20th February 2015

  

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To mine coal in South Africa, mining companies have to be 26% black owned. To supply State-owned power utility Eskom, the highest coal user, the companies have to be 50% black owned.

Mining companies which have a 50% black ownership will have an equal share in the company management and the historic miners do not want to hand over this sort of control to others, black or white, just so that they can sell coal to Eskom. Thus, what happens is that a black middleman gets to buy coal from the large coal producers and then sells it to Eskom, which, naturally, has a cost implication.

Eskom does not like this and is pushing for the 50% ownership. Business Day has reported that Anglo American is battling to settle a coal deal with Eskom over the matter of black shareholding. The matter is such that Eskom, according to Business Day, needs four-billion tonnes of coal for the next ten years and has not secured contracts for 2.17-billion tonnes. One has to wonder about the people at Eskom. Who are they, in fact? Black economic- empowerment holdings are a matter for empowerment charters and government, not an energy supplier. But the Eskom guys think that it is, in fact, their matter to decide.

I am slightly open-mouthed at all of this. It is a bit like preventing the lower classes from walking onto the deck of the first-class section of the Titanic, just after the iceberg struck. Very clearly, Eskom has, in its wings, a whole lot of hawk-eyed wide boys waiting to be given a significant chunk of a coal mining giant, all due to the pressure of a similar bunch of ruthlessly interested Eskom supply chain managers.

Eskom thinks that Anglo and other miners have no option to buckle in to the pressure of meeting its demands. This is very foolish of Eskom and a lot like Napoleon invading Russia in 1812 – there may be illusions of progress, but they will have to retreat with considerable loss.

Let us not forget that Anglo has more than one option with regard to coal sales. It can export it, process it, burn it or just not mine it. Coal exports do have to be high grade and the Eskom stuff can be low grade. But if Anglo does not send it to Eskom, it could always decide that, what the heck, it can build its own power stations and supply power to its own mines and enterprises. It will need a generation licence for this, but if it goes to court, it can easily prove to the judge that this is required, given (guess what) the intermittency of the Eskom supply. Alternatively, Anglo can process the coal for other purposes (as does Sasol) or it can decide just not to mine it at all. It can say, look, Eskom, you want us to be 50% black owned but we are not going to do that, so we will mothball this lot. Good luck in getting coal from whoever.

Perhaps the Australians mining in the Waterberg will change to 50% black ownership. Not supplying Eskom is not first prize on Anglo’s list but being 50% black owned is not either, so Anglo’s options may well be exercised. I wonder what Eskom would do if a large consumer just decided to go it on its own. Eskom was once the fourth-cheapest power in the world and a well-run company with foresight. It is not cheap any more and the foresight is gone, in my opinion.

Not since Pacific Gas & Electric, of California, drove itself off the grid in 2001 has there been such a determined effort by a power utility to commit Hari-Kari – Eskom fires/retrenches all the staff with institutional knowledge and replaces them with untrained people, gets the ruling party to buy a 25% equity stake in a boiler manufacturer that will supply Eskom (but the boiler manufacturer cannot make boilers, actually) and gives the contract for the design of the boiler control software to a firm that has three goes at designing it before giving up. Now it is playing Mexican Standoff with Anglo. Who will blink first? I think I know.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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