Eskom has no backup plan after stopping coal supply deal

[Kevin Lancaster]

Eskom has no backup plan, stops coal supply deal

Eskom does not have a contingency plan should coal supplies at its Hendrina Power Station be depleted, after administrators on Friday suspended a supply deal.

 

[])ragon_\/oid]

So, Load Shedding to continue again?

 

[j4ck455]

Under the current contract, which is valid till 2018, Optimum supplies coal to Eskom at R150 per ton.

That price sounds like it is well below cost (especially labour).

 

[MickZA]

Optimum’s administrators were seeking a new contract in which Eskom agreed to pay a “cash cost of production” of between R400-R450 per ton of coal.

Under the current contract, which is valid till 2018, Optimum supplies coal to Eskom at R150 per ton.

When did Optimum sign this contract?

... as far as I can tell coal has been over $40/ton internationally since 2010.

 

[nexxus]

What does it matter what Optimum want? They're a large enterprise and they signed a deal. One of the reasons that we're in this mess is that Eskom is contractually obliged to provide electricity at far lower than cost to some of it's customers.

That's why you sign these contracts to begin with, to hedge against cost increases.

 

[Creag]

When did Optimum sign this contract?

... as far as I can tell coal has been over $40/ton internationally since 2010.

Good questions posed here. There should have been clauses in the contractual agreement which allowed for reasonable increases in costs and overheads.

Although the international price for coal might have remained constant, local costs to mine and produced have been subjected to increases from labour (never inflation or less) and electricity. If they have suffered from any strikes or actions from labour, that would complicate this further.

 

[ellyally]

Perhaps they could just use the Medupi coal that is being paid for but not being delivered or used... yes, there will be additional cost to get coal there, but at the moment, that cash, which is 9% of eskoms annual expense(according to report a few days back), is being flushed down the toilet and will be for a few years to come(thats if medupi ever gets completed). At least by getting it shipped to a functioning plant it won't be a complete waste of money

 

[richjdavies]

It's nice to be an arm-chair economist here, but a lot of the 'solutions' and problems spouted are just not true.

- The world price of coal has nothing to do with the price of a long-term coal contract, especially for a 'local' tied mine. Why you ask? My next point...
- Realise that transport IS the major cost in mining. Think again about the prices we're talking here... $10-40 per TONNE!. Yes TONNE!. That is DELIVERED price. The price of transport (when it's not on a ship admittedly) is a HUGE proportion of the cost and therefore price of the coal. Think about it - a 40T truck - that's those MASSIVE double tipper trucks, cost at least R10/km - so move a load a few hundred km and you've paid more in transport than for the coal

The only conclusion to draw is:
1. It's not worth Optimum running the plant - marginal costs > revenue
2. Eskom have a contract for supply that Glencore first of all were supplying bad quality - so rightly can sue
-- as such Optimum have decided it's simply not worth running the plant; they're taking the risk.

To bring this whole thing home. Look at the area around Hendrina Power Station -- one of the plants that Optimum has stopped supplying.

See those black surfaces all around... that's the 'mines'. They aren't deep underground mines, they are pretty much just scraping the coal off the earth. Then taking it to the coal plant*. That's the only way you can make coal at less than R200/tonne... and that's 95% of what Eskom and electricity in South Africa relies on!
* - okay they take it off, wash it and sort it... but clearly they've not been doing that quite well enough - see Eskom suing!

Eskom is a monopoly; locally to the plant Optimum is a monopoly... these things never end well...

 

[furpile]

Many of these long term contracts were signed in the 80's and 90's (this one the article states 1993) when commodity prices were a lot more stable. Now after the economic boom and recession all the markets are in chaos, and these outdated contracts are doing more harm than good. That is why aluminium smelters are paying a lot less for electricity than the rest of the country (electricity cost based on the aluminium price), and this mine supplying coal at a loss. Iscor also had a deal like this with Kumba where it got iron ore at cost + a few percent, and that price was about 20% of market price. Going forward, I don't think companies will easily sign such long term agreements again.

 

[Musicmp3]

I hear Eskom on the other hand are paying more for diesel than at the pumps because of BEE deals with connected ANC cadre.

No plan B but we will make one after the doggy Doo has hit the fan. Oh so typical of these clowns.