Industry Trend Analysis - Coal To Remain On Steady Growth Trajectory - JULY 2017


BMI View: Coal production in Sub-Saharan Africa will be supported in the coming years by large untapped reserves and growing demand for cheap energy in emerging markets in Africa and Asia.

Coal production in Sub-Saharan Africa will continue to edge higher as a burgeoning population in Africa and Asia drives demand for low-cost energy, which will increasingly be sourced from the continent's large untapped coal deposits. South Africa will remain the largest regional coal producer by far, as foreign investment and rising exports help the country maintain its more than 90% share of total coal output in Africa over our forecast period from 2017-2021. Meanwhile, Botswana will post the strongest regional production growth rates over the next five years on the back of large reserves and a favourable investment environment, which will result in a strong project pipeline. Despite this, other major coal producing countries in the region will find it harder to witness significant growth in their respective coal sectors over our forecast period due to infrastructure deficits, political/economic instability and falling coal prices. We forecast coal production growth in Sub-Saharan Africa to average 2% over 2017-2021, up from 0% during the previous five years.

Coal Production To Recover Beyond Previous Highs
Sub-Saharan Africa Coal Production (mnt) & Growth (% y-o-y)
Note: Chart includes output data for South Africa, Mozambique, Zimbabwe, Botswana, Zambia and Tanzania. Source: BMI Research.

South Africa

South African coal output will rise in the coming years due to growing domestic and international demand, although any significant gains will be offset by the government's growing commitment to renewable energy. On the domestic front coal mining will remain supported by the country's dependency on thermal coal, which accounts for approximately 80% of total domestic power generation. In line with this view, BMI's Power Team expects coal-generated electricity in South Africa to increase from 223TWh in 2017 up to 259TWh in 2026. Although South Africa consumes most of its coal domestically, we expect the country's coal industry to also benefit from the increasing presence of Indian companies which are looking to serve the Indian market. For instance, Indian companies Jindal and Atha Group have already invested in South African coal and, more recently in March 2017, Vedanta Resources announced it will purchase an 11% stake in Anglo-American. These investments will complement India's growing role as South Africa's main destination for coal exports, which grew to 23.2mnt in 2016, up from 17.7mnt in 2012. Moving forward, we expect this trend to continue as India looks to satisfy its growing energy needs with cheaper alternatives to high-quality Australian coal.

Despite these positive developments, the South African government's pledge to reduce emissions by reducing the share of fossil fuels in the domestic energy market from 80% currently to below 60% in 2050, will pose headwinds to South African coal production in the longer term. In February 2017, President Zuma announced efforts will be made to implement the South African Renewable Energy Independent Power Producers Procurement Programme (REIPPPP) which aims to progressively increase the share of renewable energy to the national power mix in the years leading up to 2030. As part of the wider move away from fossil-fuels, in March 2017 state-owned energy company Eskom announced plans to phase out up to five coal power stations, including Kriel, Camden, Hendrina and Komati in the next five years. As an added challenge to the coal industry, a new carbon tax is set to be implemented in late 2017/early 2018 which could hurt producer's margins and lead to further mine closures.

South Africa To Remain Dominant
Select Countries - Share of African Coal Produciton (% of total)
Source: National Sources/BMI

Botswana

Botswana will be the regional outperformer when it comes to average coal production growth in the coming years, as the government earmarks the expansion of the coal sector as a central element of its strategic plan to diversify away from the diamond industry ( See , ' Southern Africa To Dominate Coal Power Landscape ' , November 1 2016). As a result, Botswana is witnessing an influx of investment into the development of domestic coal projects. While the country currently owns one operational coal asset, the Morupule mine , Botswana ranks only behind South Africa in terms of new coal mines due to come online, with 12 coal projects in the pipeline according to our Mining Projects Database. More recently in June, state-owned Shumba Energy signed a MoU with Basil Read Mining to provide mining solutions that will help streamline Shumba's operational business and develop coal assets in Botswana. Moving forward we expect the Botswana government to leverage the country's 200 billion tonnes (bnt) of coal reserves in order to capitalise on Southern Africa's impending infrastructure boom and the resulting energy needs that will come with it, leading BMI's Power Team to forecast coal to account for 94% of the domestic power mix by 2026, up from 64% in 2017.

Botswana Outperforming Among Subdued Regional Growth
Select Countries - Coal Mine Production Growth (% y-o-y)
e/f = BMI estimate/forecast. Source: National Sources/BMI

Mozambique

Mozambique's coal mining outlook will be negatively impacted by a weak project pipeline, a lack of investments in infrastructure and general instability. The necessary increase in investments to avoid stagnating coal exports will face headwinds from the country's growing economic problems ( See, 'Coal Exports Could Peak Without Further Investment ' , February 23 2017 ). In effect, the increasing likelihood that no settlement will be reached on debt-restructuring negotiations between the government and creditors could potentially deter future foreign investment and delay current project implementation ( See , 'Headwinds to Growth Will Deepen without Creditor Settlement' , June 6 2017). Furthermore, political tensions between the Mozambican National Resistance and the government, as well as high levels of corruption will pose additional headwinds to the coal mining sector. Despite this, we forecast Mozambique to maintain its spot as the second largest coal producer in Africa, increasing output from 7.2mnt in 2017 to 8.2mnt in 2021, as major foreign miners already present in the country are unlikely to pull out in the near term.

Zimbabwe To Fade Away
Mozambique & Zimbabwe - Coal Mine Production (mnt)
e/f = BMI estimate/forecast. Source: National Sources/BMI

Zimbabwe

Zimbabwe's coal output will suffer an outright decline over our forecast period from 2017-2021, as growing economic problems spill over into the coal industry. As an example, preliminary data released by the country's Chamber of Mines suggests coal production during 2016 may have decreased relative to 2015. This comes as a result of Zimbabwe's Power Company (ZPC) failing to pay the country's main coal miner, Makomo Resources for coal production due to a lack of funds, an issue which may continue to plague the country's industry moving forward. Furthermore, the country will struggle with new coal generation in the coming years as only two new coal projects which are yet to be developed - Lubu and Lubimbi - are currently in the pipeline, according to our Mining Projects Database.

Select Countries - Coal Mining Data
Geography Indicator 2012 2013e 2014e 2015e 2016e 2017f 2018f 2019f 2020f 2021f
e/f = BMI estimate/forecast. Source: National Sources/BMI
Botswana Coal Mine Production, mn tonnes 0.74 1.50 1.50 2.01 1.93 2.30 2.72 3.13 3.49 3.77
Botswana Coal Mine Production Volumes, % y-o-y -6.06 101.07 0.24 34.00 -4.00 19.00 18.40 15.00 11.60 8.20
Mozambique Coal Mine Production, mn tonnes 4.95 6.34 6.50 6.57 6.83 7.20 7.59 7.90 8.10 8.18
Mozambique Coal Mine Production Volumes, % y-o-y 664.25 28.04 2.50 1.00 4.00 5.41 5.50 4.00 2.50 1.00
South Africa Coal Mine Production, mn tonnes 253.00 258.57 259.86 262.98 252.46 248.67 252.40 257.45 263.89 271.80
South Africa Coal Mine Production Volumes, % y-o-y -3.07 2.20 0.50 1.20 -4.00 -1.50 1.50 2.00 2.50 3.00
Tanzania Coal Mine Production, mn tonnes 0.05 0.05 0.06 0.06 0.06 0.06 0.07 0.07 0.07 0.08
Tanzania Coal Mine Production Volumes, % y-o-y 0.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00 5.00
Zimbabwe Coal Mine Production, mn tonnes 3.00 4.90 5.29 5.56 6.22 6.78 6.99 6.78 6.17 5.24
Zimbabwe Coal Mine Production Volumes, % y-o-y -6.35 63.55 8.00 5.00 12.00 9.00 3.00 -3.00 -9.00 -15.00