Warning signs for one of South Africa’s biggest employers

South Africa’s coal mining industry is under increasing pressure from low commodity prices and logistical inefficiencies that prevent companies from getting their products to market. 

These pressures have also come when coal production in South Africa is declining, resulting in local companies missing out on revenue as India and China ramp up demand for the commodity. 

This also means the country is losing out on vital foreign exchange earnings that would boost the local currency and economy. 

While gold mining has lost its shine as the material has been largely mined out in South Africa, coal, iron, and platinum have grown strongly. 

The first two commodities, coal and iron, are different businesses from gold and platinum mining, requiring highly efficient bulk exports to make them profitable. 

Historically, South Africa’s rail and port network has been very good at providing cheap and efficient transport of goods to global markets. 

However, Transnet’s performance has deteriorated in recent years, leaving many mining companies looking for alternative ways to export their goods. 

The GAIN Group estimated that South Africa’s inefficient logistics system cost the country around R353 billion in lost economic activity last year. 

In a recent research note, the Bureau of Economic Research (BER) outlined the impact of Transnet’s poor performance on the coal and iron ore mining industries. 

Coal and iron ore are among South Africa’s largest export commodities and, thus, depend heavily on the rail network for transport from the mines to the port.

Most coal exports flow through the North corridor to the Richards Bay Coal Terminal (RBCT) in KwaZulu Natal, a 24-hour terminal with a capacity of 91 million tons per annum.

Iron ore is railed on the Ore Corridor, which runs from the Northern Cape to Saldanha Bay in the Western Cape. This is the only iron ore export facility in South Africa. 

Transnet’s deterioration is uniquely challenging for coal and iron ore minors because the capacity of the ships that collect the material for export is so large that they cannot be transported via road from mines to the port. 

And so, if Transnet’s rail network fails to operate efficiently, these businesses are effectively hamstrung. 

The BER said the utility’s poor performance has prevented South Africa from reaping the potential benefits of the commodity boom in 2020 and 2021. 

Without swift reform, these industries will continue to miss out, costing companies billions in revenue and thousands of jobs. 

Following the Covid-19-induced slump in global demand in 2020, 2021 saw coal and iron ore prices soar by 72% and 31%, respectively. 

In 2022, an increase in gas prices following Russia’s invasion of Ukraine caused European coal demand to soar, contributing to a staggering 145% increase in the coal price. 

One would expect that – subject to freight rail capacity – such extreme price increases would encourage production and export volumes to grow as miners capitalise on this opportunity, but this is not how things transpired. 

The failure to capitalise on this opportunity can be seen in the graphs below. 

Dark clouds gathering

A further headwind for the coal mining industry in South Africa is the country’s transition towards a low-carbon economy. 

Researchers at the Reserve Bank, Pierre Monnin, Ayanda Sikhosana, and Kerschyl Singh, issued this warning as part of an analysis of the transition’s impact on South Africa’s economy.

Coal mining is a vital source of employment and foreign exchange earnings and fuels the local economy as 83% of electricity generation comes from burning the commodity. 

South Africa has committed to winding down the use of coal to power its industry and households. The country is on track to reach its goal of reducing greenhouse gases sufficiently to limit global warming below 2°C. 

The reliance of South Africa’s economy on coal, both as an energy consumer and as an exporter, is critical to manage as it transitions to a low-carbon economy. 

The researchers warned that if the transition away from coal is not managed properly, the effects could pose a systemic risk to the financial sector and the broader economy. 

If coal mining collapses in South Africa from a poorly managed transition, the country could lose up to 92,000 jobs. 

The researchers said this does not mean the transition should be halted. Rather, its decline should be managed appropriately, and workers should be reskilled to find other jobs. 

South Africa’s carbon-intensive economy, poor economic performance and energy insecurity pose challenges for the country’s transition.

Between 2013 and 2035, South Africa faces a transition risk estimated at more than $120 billion (R2.2 trillion) in present value terms. 

This transition risk estimation is largely attributable to coal dependency and a reduced export cash flow of US$83.7 billion (R1.5 trillion).