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DE RUEHJO #0338/01 2511601
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FM AMCONSUL JOHANNESBURG
TO RUEHC/SECSTATE WASHDC 5282
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFIUU/DEPT OF ENERGY WASHINGTON DC
RUCNSAD/SADC COLLECTIVE
RUEHJO/AMCONSUL JOHANNESBURG 1938

UNCLAS SECTION 01 OF 03 JOHANNESBURG 000338 
 
SIPDIS 
 
SIPDIS 
 
STATE PLEASE PASS USAID AND USGS 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
DOE FOR THOMAS SPERL 
 
E.O. 12958: N/A 
TAGS: EMIN ENGR ECON SENV SF
SUBJECT: THE SOUTH AFRICAN COAL INDUSTRY:  PART III -- PLANS AND 
FACTORS INFLUENCING COAL PRODUCTION 
 
REF: A) JOHANNESBURG 335 B) JOHANNESBURG 337 
 
JOHANNESBU 00000338  001.2 OF 003 
 
 
¶1. (U) Introduction:  This is the third of a four-part cable 
dealing with coal and the important role it plays in the South 
African economy.  Part 3 provides information on some of the new 
and expansion projects underway and planned clean-coal 
developments.  It reviews some of the policies and legislation 
applicable to coal and looks at the major opportunities and 
threats to the production and exports of South African coal. 
Reftel A contains a summary for all four parts.  End 
Introduction. 
 
Future Plans for Coal 
--------------------- 
¶2. (U) In light of Eskom's critical need to expand generation 
capacity, the next five years should see four coal-fired plants 
come on stream.  Three plants with a total capacity of 3,540 MW 
are currently being brought back into service and the fourth is 
a 2,240 MW expansion to the 3,690 MW Matimba plant, located on 
the Waterberg field.  Kumba plans to double its coal output by 
2010, including increasing output from its Grootegeluk mine by 
6.3 million tons per year to feed the Matimba expansion.  Plans 
also include a new export coal mine of 10 million tons per year 
(probably also located on the Waterberg field), to come on 
stream in 10-12 years.  Plans are linked to Kumba's 
participation in the Richards Bay Coal Terminal (RBCT) 
expansion, which would allow the company to increase exports to 
3 million tons per year, and to the upgrading of the rail link 
to the Grootegeluk mine. 
 
¶3. (U) Kumba Resources has also concluded an agreement with the 
Botswana Government to begin a pre-feasibility study for the 
development of the Mmamabula coalfield.  This is the western 
extension of the Waterberg coalfield which hosts South Africa's 
largest coal operation and the world's largest coal 
beneficiation complex. 
 
¶4. (U) Other coal companies intend expanding production to feed 
planned new Eskom power plants.  Rio Tinto is exploring the 
coking and steam coal potential of the Limpopo coalfield, and a 
number of projects are underway to provide export coal for the 
RBCT expansion.  The coal industry is confident that it can 
supply an additional 30 to 40 million tons per year for export 
and to meet the future needs of Eskom and Sasol.  However, there 
is concern that South Africa's rapidly diminishing reserves of 
higher quality coal may not be able to sustain exports of 91 
million tons per year for any length of time.  Much reliance is 
being placed on new BEE and smaller scale producers to fill the 
production gap and on technology to upgrade coal for export. 
 
Clean Coal Technology 
--------------------- 
¶5. (U) More stringent controls on all forms of coal pollution 
are inevitable.  Eskom's Executive Manager, Dr. Steve Lennon, 
has stated that any new coal plants will have to be based on 
state-of-the-art clean-coal technology and improve efficiency to 
ensure that less CO2 is emitted per unit of production. 
Established carbon capture and storage technology is not yet 
economically viable and require about 40% of the energy produced 
just to remove CO2.  Major producers and users of coal, 
including Anglo Coal, BHP-Billiton and Eskom, are participating 
in the United States' FutureGen project.  This project has as 
its goal the development and construction of a coal-based power 
plant that will produce near-zero emissions.  A prototype plant 
is planned to be operational by 2012.  Experience from this will 
be applied in South Africa. 
 
¶6. (U) In the meantime, best-practice clean coal technologies, 
processes and operations are being evaluated.  Eskom is 
operating an experimental in-situ underground coal gasification 
project at the Majuba colliery and is investigating the 
viabilities of coal-bed methane (CBM), fluidized bed combustion 
(FBC), combined cycle gas turbine (CCGT) generation, pressurized 
boilers  and other developed and developing technologies.  An 
immediate goal for Eskom is the management of supply and demand 
and the efficient use of electricity, which it claims will save 
the construction of a 3,600 MW plant over a ten-year period. 
 
Legislation and Policy 
---------------------- 
¶7. (U) Since the ANC-dominated government was elected in 1994 it 
has enacted legislation aimed at transforming the South African 
labor market and the public and private sectors.  This includes 
a host of general labor, equity, affirmative action and economic 
empowerment legislation aimed at propelling historically 
disadvantaged South Africans (HDSA) into the formal economy. 
Specifically, provided for are improved working conditions; 
 
JOHANNESBU 00000338  002.2 OF 003 
 
 
upgrading skills; advantageous access to employment 
opportunities; and participation at all levels in the economy. 
 
¶8. (U) The minerals industry is South Africa's most important 
economic sector and was the first targeted by the SAG for 
transformation and empowerment.  The government's aim was and is 
to enable (initially through legislation) HDSA to play an 
increasing role in all aspects of the minerals sector, from 
which they were effectively excluded under apartheid 
legislation.  Transformation was to be accomplished through The 
Mineral and Petroleum Resources Development Act (Minerals Act) 
and its appendages, namely the Black Economic Empowerment (BEE) 
Charter (Mining Charter) - both took effect in May and August, 
respectively, of 2004.  These were followed by a number of 
bills, including the Royalty Bill and the Beneficiation Bill 
that are still under consideration. 
 
¶9. (U) The Liquid Fuels Charter (LFC) of 2000 was the first of 
many industry sector charters.  It covered the oil industry from 
production and transportation to refining, retailing, skills 
development and procurement.  Its main tenet was for 25% of 
equity and management control of all South African liquid fuel 
entities to be in the hands of black economic empowerment 
companies within 10 years (by 2010) and that the industry should 
facilitate the financing of such deals.  In addition, the LFC 
required that a minimum of 25% of procurement expenditure be 
earmarked for BEE suppliers.  It also stipulated that BEE 
investment should be broad-based and for the long-term; that 
deals should take place at market value; that quality and 
standards should not be compromised; and the BEE partners should 
add value to the undertaking.  (Comment: To date, many BEE deals 
have not met these criteria.  End Comment.) 
 
¶10. (U) The LFC was followed by the Minerals Act and the Mining 
Charter, both now in force, and the Royalty and Beneficiation 
bills that are still to be finalized.  The Act and Charter 
require that 15% of a company's South African assets, as 
measured by equity, production, management control or other, as 
spelt out in a 'score card', must be in the hands of black 
people by 2009 and that this be increased to 26% by 2014.  The 
industry was also tasked with facilitating financing of BEE 
deals by up to $15 billion to 2009 and a similar amount to 2014. 
 
 
¶11. (U) The most confrontational aspect of the legislation was 
(initially) its focus on the transfer of mineral rights to state 
custodianship.  The current areas of contention are the Royalty 
and Beneficiation bills.  The early royalty discussion document 
proposed a 2% assessment on gross revenues (rather than on 
profits)for coal.  The Benefication Bill is set to propose a 
minimum level of product upgrading before export.  If not 
attained, the exporter could be required to pay some form of 
export duty.  At time of writing neither bill has been finalized 
for public comment. 
 
¶12. (U) Given that strategies to meet black empowerment targets 
have been implemented by the major coal companies throughout the 
past four years, the structure and productivity of the coal 
industry have remained largely unchanged.  Currently, nineteen 
BEE coal companies have been allocated export entitlements 
through the RBCT, own more than 20% of coal production and, 
pending completion of BEE deals, Eyesizwe Coal could leap-frog 
Anglo Coal to become the biggest producer of South African coal. 
 
 
Opportunities for South African Coal 
------------------------------------ 
¶13. (U) Sustained high prices for export coal, up some 42% since 
2003, and the continuing growth of the domestic economy, have 
been good for all producers.  Additional opportunities for coal 
could come from increased tonnage requirements from Eskom for 
its expanding coal-fired plants; increased coal exports to 
Europe and the rapidly growing economies of the Far East; as 
well as the possibility of additional coal-to-liquid (CTL) 
plants in South Africa.  Because of the significant advantages 
of coal to the South African economy, the SAG has stated that 
coal will continue its dominant role as an energy source for the 
next four decades.  This should provide industry stability and 
the opportunity to research and develop other forms of energy 
for transportation and to power industry. 
 
Threats to South African Coal 
----------------------------- 
¶14. (U) The expansion of coal exports will depend on a number of 
factors outside the control of South African producers.  Exports 
to the EU countries, which accounted for 77% of total exports in 
 
JOHANNESBU 00000338  003.2 OF 003 
 
 
2005, will depend on Europe's resolve to reduce the use of coal 
to combat climate change concerns versus cost considerations 
should oil prices continue to escalate.  Germany and Poland 
remain heavily dependent on coal while Italy is converting some 
oil-fired plants to coal and British Coal's plan to reopen a 
colliery in South Yorkshire and to build a $1.5 billion power 
plant equipped with technology to capture and store carbon 
dioxide. 
 
¶15. (U) A further threat to South African coal exports is the EU 
Commission's proposed new regulatory framework for the 
Registration, Evaluation and Authorization of Chemicals (REACH). 
 If implemented as is, the regulations would effectively embargo 
the import of raw and processed products containing any form of 
toxic or polluting elements, which could include coal.  However, 
given current concerns regarding energy supply security, it 
seems that the EU will continue to use coal and is likely to 
employ clean coal technology (CCT) to control emissions. 
 
¶16. (U) Major competition to South African coal exports is 
likely from Australia, Columbia and Indonesia, which produce 
higher quality steam coals.  Nuclear power plants are also a 
competitive threat, given uranium's geographically-friendly 
distribution - South Africa, Canada and Australia - and its 
minimal emissions.  However, the current general distrust of 
anything nuclear could retard further development of nuclear 
energy. 
 
¶17. (U) While alternative and renewable energy forms may pose a 
threat to coal (and other fossil fuels) in the future, mainly 
for off-grid power and as a supplement to liquid fuels, the 
South African focus is likely to be on developing clean coal 
technology and on commercializing the mini-nuclear power Pebble 
Bed Modular Reactor (PBMR), scheduled for production from 2013 
onwards (a prototype has yet to be constructed). 
LUOMA-OVERSTREET