The global war against coal: What does the future hold for coal?

The annual South African Coal Export Conference 2018 held in Cape Town from 31 January 2018 to 2 February 2018, highlighted the various opportunities and challenges associated with coal globally, and in the Southern African region in particular, with South Africa, Botswana and Mozambique being the key players.

5 Feb 2018 5 min read Mining and Minerals Alert Article

During the past few years there has been a slump in the global demand for coal, similar to other commodities. This has largely been caused by structural changes in the economy – with a reduced demand for coal, coupled with increased investment in the renewable energy sector by China and other countries. The past few months have, however, seen a rejuvenation of confidence in the demand for coal. 

Coal has played and continues to play a major role in the South Africa economy, with its impact spanning the entire value chain – from production to beneficiation – with approximately 90% of South Africa’s electricity derived from thermal coal. Of the total coal produced in South Africa as at December 2017, 76.47 million tons of coal were exported – a record-breaking year for the Richards Bay Coal Terminal. Compared to all other commodities, coal was the largest revenue generator for the South African economy during 2017 – contributing approximately R131,4 billion. Coal thus plays a very important role in South Africa’s growth and development. 

Despite coal’s importance, the industry’s role in the economy is being disrupted by a number of policy and regulatory changes in the market, such as South Africa’s climate change commitments to reduce greenhouse gas emissions under the Paris Agreement, an uncertain mining regulatory framework which has been causing jitters in the mining sector, and the policy shifts to reduce the contribution of coal in South Africa’s energy mix. The gradual move to more reliable renewable energy sources is the biggest disrupter for coal to continue as South Africa’s baseload energy source. The new draft Integrated Resource Plan of November 2016 (draft IRP) - which went through a public participation process during 2017 – made this shift even clearer with the intention of reducing coal’s contribution to the South African energy mix to less than 40%. This implies a dramatic reduction in the production of coal in South Africa for the utilisation in the domestic market, and probably also for the export market. This move away from coal comes despite some other markets, such as India, still investing heavily in coal fired-power stations to ensure at least 200 million people have basic access to electricity. 

How will coal remain a relevant energy commodity in a future where it will be plagued by carbon taxes, export restrictions and policies requiring the use of “clean coal” for energy production? Both producers (miners) and users of coal (utilities) need to invest in the advancement of clean coal technologies (such as carbon capture and storage, underground coal gasification, and so on). These investments (which to an extent are already happening) will ensure that in the long-run coal could continue to sustainably contribute to the economic development of coal-rich regions such as South Africa, Botswana and Mozambique. The investment in “clean coal” will further be a catalyst for the enhancement of other cross-sectors, as “clean coal” implies becoming more innovative and market leading – thereby growing and developing service sectors that support a “clean coal” revolution.  

Producers of coal are also plagued with regulatory uncertainties in the mining sector. The vague and ambiguous requirements of the Reviewed Broad Based Black-Economic Empowerment Charter for the South African Mining and Minerals Industry, 2016 (new Charter) are currently the subject of a lengthy court battle, including concerns relating to certain of the provisions of the Mineral and Petroleum Resources Development Amendment Bill, 2013 (MPRDA Amendment Bill). The regulatory uncertainties are having a detrimental effect on future investments in the mining sector, as investors are reluctant to invest in a sector where the ‘rules of the game’ are unclear and constantly in flux. The new Charter has good intentions to ensure meaningful transformation of the mining sector, however, a number of its provisions appear to violate the rule of law. The most evident of these: the proposed retroactive application of ownership requirements, the potential violation of international law commitments in respect of the local content requirement for the procurement of goods and services, and certain provisions conflicting with other laws and legal principles under South Africa law. 

For the coal miners, an added concern is the provision of the MPRDA Amendment Bill which empowers the Minister of Mineral Resources (Minister) to declare certain minerals such as coal as so called “strategic minerals”. The Minister’s right implies that once a mineral such as coal is declared as a strategic mineral, the export thereof could be restricted in order to meet the domestic requirements at a set price. The initial thinking behind this ministerial power was to ensure the security of supply of minerals such as coal for the domestic thermal coal market. It is not clear whether such a need has dissipated with the policy change on coal’s contribution to the energy mix, but this remains a factor investors will take into account when contemplating investments. The authority of the Minster to declare certain minerals as “strategic minerals” must be clearly defined and set out in either the principle act or regulations, similar to what is found under the Diamonds Act for the exportation of diamonds. Without clarity on the Minister’s authority - specifically the objective grounds to be relied on in declaring a mineral as a “strategic minerals” – producers’ export of coal may be restricted despite buyers placing forward orders for the delivery of seaborne coal. It is thus imperative for the industry to lobby for the “rules of the game” to be made clear at the onset – to avoid future costly disputes with the Minister on the scope of his powers.  

During this year’s World Economic Forum meeting in Davos, the Deputy President of South Africa made various commitments to ensure that all the inhibiters to growth and development – such as policy and regulatory uncertainties – will be addressed. In order to ensure sustainable growth and development for South Africa, which will be the catalyst for meaningful economic transformation, it is imperative that government has a serious dialogue with all stakeholders in the mining and energy sectors to root-out the evil called “uncertainty”. Uncertainty is the biggest cause for investment decline in the mining and energy sector. If the “rules of the game” are clear – the economy will see more investment flow to critical sectors.   

The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2024 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us