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Long-term contracts are cure for Eskom’s coal cost woes, says South32

A move away for short-term supply contracts will lower costs and ensure quality

One of Eskom’s biggest suppliers has called on the state-owned power utility to return to long-term supply contracts to bring its coal costs down.

South32 COO Mike Fraser was speaking on Wednesday the 2019 Joburg Indaba about the government’s recent request for coal suppliers to consider cost reductions, to help out financially embattled utility and, in turn, the economy.

The diversified miner owns SA Energy Coal, which supplies more than 12% of Eskom’s coal needs. The company is, however, in the process of disposing of the assets, having signed an exclusivity agreement with Seriti Resources.

“As a major supplier of coal to Eskom, we acknowledge the recent request from the government for suppliers to support their cost-reduction efforts and will continue to work with them to manage their costs while we ensure that our operations are sustainable,” said Fraser.

“However we do believe the best way to reduce the cost of coal to Eskom is to transition back to long-term contracts. That will enable a reduction in the volume of coal moving on road at higher cost and often at variable qualities.”

He said there would still be a place for smaller spot market placement of coal contracts.

Long-term contracts fell out of favour under the leadership of former Eskom CEO Brian Molefe. At the release of Eskom’s annual results in August, public enterprises minister Pravin Gordhan bemoaned that Eskom’s coal costs had increased an “extraordinary” 17%.

Eskom’s sustainability and investability is one of the key risks facing SA’s economy and drastic action is needed, Fraser said.

The government’s proposal to unbundle Eskom into three different businesses — generation, transmission and distribution — “makes huge sense”, Fraser said.

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