Transcribed by Brian Magee
David Strahan: Hello. I’m David Strahan, the author of The Last Oil Shock: A Survival Guide to the Imminent Extinction of Petroleum Man. And this is a podcast from lastoilshock.com, sponsored by Global Public Media, public service broadcasting for a post-carbon world.
Gerard McCloskey, thank you very much for talking to me. First of all, what on earth is going in the South African electricity supply at the moment?
Gerard McCloskey: Well, it’s just run out of puff. They’ve withdrawn supply, almost across the board in some areas, and certainly—crucially—to the mining industry, including the coal mines that supply them with coal, which is ironic because one of their problems is shortage of coal.
But their other problems are much more endemic. They’ve been saying for years—the utility Eskom in South Africa—that they need to build 2 gigawatts, 2,000 megawatts, of power every year for the next 20 years just to keep up with demand.
Now, basically, the government’s just ignored them,
and at the same time have sustained across the border exports to
And, so, they’ve suddenly got a crisis that everyone knew was going to hit them. And the problem is it’s going to take a long time to resolve. They’re going to have to build new plants and that takes years.
Now, in the meantime they can manage demand a bit. But managing demand means
discouraging new industries that are going to use power from coming to
They’re trying to get more coal out of the coal industry. But the prices that Eskom were paying were inadequate to develop new mines. And the difficulty for Eskom right now is that the world prices are going to unprecedented highs, partly because of the problem from South Africa because there will not be the volume of exports that people expected, and partly because of problems elsewhere, and that prices in South Africa are a fraction of that.
DS: I just wanted to come in on that, Mr. McCloskey. There's this interesting irony that you say that, in part, the problem is caused by a shortage of coal, and yet the power cuts make it harder to mine more coal. But to what extent is this really… I mean, how would you divide up the causes; what’s most important? Is it really the capacity in the electricity industry or is it a shortage of coal? How would you balance those causes?
GM: No. It’s capacity within the electricity industry because among their options were to build non-coal plants and they’ve just have been frozen in their activity, and they have some under construction now, which will come on. They also have problems with their nuclear plant which has put the nuclear unit off for some time. But it was a clearly identified need they did nothing about.
There is ample coal reserve but a lot of the mines have had some mining difficult because of flooding. So that’s made matters worse.
But I don’t think that, unless they are prepared to offer higher prices—instead of, say, 120 rands a ton, offer something like 250 rands a ton at the mine—people aren’t really keen on developing new mines. So it’s a price issue and it’s a development issue.
DS: Why does this matter to the rest of us, if I can put it that crudely? Is there effectively a fight between coal for export and coal for domestic use in South Africa at the moment?
GM: Yeah. They’ve got an infrastructure capacity, railroad and ports, that can ship 72 million tons onto the world market. Last year they did 6 million tons less than that. And it looks as though, despite record prices, they will have to cut back on exports in order to supply Eskom.
Now, that has come at a time when almost identically, on the day that they cut the power from Eskom, the Chinese government announced it was going to ban all exports. That has double effect, okay. No exports going out of China—they exported 42 million tons of steam coal last year—but also the guys in the southern provinces, in Guangdong and the other southern provinces, are now going on to the export markets to try and import coal into the south.
So you already had a very tight market, and then
DS: Now what does that mean in terms of from here on in? Because these are seemingly unrelated events doesn’t mean that this crisis, if you want to call it that, can be solved quickly, and if so, do you think it’s likely to be?
GM: It can’t be solved quickly because half the problem in some of these places—certainly in Queensland, certainly to an extent in New South Wales—is they haven’t sufficient port capacity. And while they’re expanding the ports the development of the rail capacity to supply the ports has been going too slowly to keep pace with that. So, you have the coal that could be exported but you haven’t got the infrastructure to do it.
So you already had a tight situation which was stuffed up by the weather in
And the market had already reached a very fragile state because you’d
had three political interventions which had withdrawn coal from the
international market. You had Chávez in Venezuela
instructing the state-owned Corpozulia company to stop delivering on all
their contracts and go out and renegotiate them; rather like Putin—cut
off the gas supply to the Ukraine a couple of years ago. So that’s taken
3 million tons off the market. You had the Russian railroads refusing to take
coal through Estonia after
the destruction, or the moving, of the statue to the Unknown Russian Soldier,
and the same railroads refusing to take coal through to the
DS: So where do we go from here? I mean, you say it’s not going to be solved quickly, but what actually do you think is going to happen? How is this going to play out and where will prices go in the meanwhile?
GM: Well, one of the impacts has immediately been on pricing. You have a fairly fluid market in steam coal and you have a very clunky market in coking coal with prices set every year. But in steam coal where we would normally see prices going up and down, 1-2-3 dollars in a week, in a very volatile week, we’ve seen in steam coal since last Friday, between Friday and Tuesday prices went up $13 and they’re continuing to go up.
I think that the impacts will be… well, we just don’t know how big a problem China’s going to pose to anyone. China mines 2.6 billion tons of coal a year. So if it’s out for a couple of months, that hundreds of millions of tons of coal that they will not ship to their supplies in the south and they will not ship to the international market.
So, until we see whether the snow storms have had a devastating effect, which has taken, say, 10-20-30-40 million tons out permanently, or whether it’s much greater than that, it’s difficult to see and evaluate what that impact is going to be.
Right now the impact is on pricing because people are taking a very pessimistic view—China combined with Queensland combined with South Africa. And the pricing will have the trick of probably sucking a lot more U.S. coal on to the international market.
Now, the U.S. used to be
a big steam coal supplier to Europe, but it backed out when it just
couldn’t compete with the low prices from South
Africa, from Columbia,
and so on. But as the international prices got higher and higher, the U.S.
market is in a totally different situation and has very, very low prices, very
big stockpiles, very low demand levels. But you need to get—reconstruct—the
old infrastructure that existed in the U.S.
of a big barge fleet coming down the Mississippi,
coal coming out through the gulf of the
DS Is that easy to do quickly, or is that going to take some time?
GM: I think that’s a question that no one knows the answer to. We think the U.S. will go from about 8 million tons of exports last year to about 18 this. But they’re not going to make the big investments at the ports and on the rail and on the barges if they believe it’s going to be a 12-month wonder.
Now, it was already happening; we already expected a big flow of
But because of the of the paucity of coking coal the U.S. was being asked in any case to supply another 5-10 million tons of coking coal to world markets, and that can gung up the whole infrastructure system there before you go out asking for steam coal.
But I do think the price will resolve it. I do think price will suck a lot more coal out of the U.S. and that will build up through this year and certainly into next year. So it gets a solution in time.
DS: Just come back to the other key players in this problem.
GM: South African has plateaued at around 66 million tons of exports. They’re trying to involve more and more black empowerment companies to get onto the export market and they were going to expand the big export terminal, Richards Bay, to about 91-92 million tons. So it’s become a less significant supplier from a point of view of market share.
What we’ve seen very recently is the
emergence of India
as a big coal importer. It has two natural sources. One’s
But that was last week. This week I think they’re going to have to do at least twice that—at least 9 or 10 million tons—in order to supply the growing demand which China, one way or the other will not supply, which Queensland, one way or the other will not supply the growth of, and which Indonesia is going to find itself, I think, supplying its closest neighbor, just shipping north into Guangdong and the other provinces.
So South Africa is certainly much more important
part of the equation that it was a couple of years ago when it was really being
eclipsed by Columbia and Indonesia, and I think going forward because we expect
demand for international steam coal to go up from, say, 650 to 800 within the
next 10 years. And some of that has got to come from South
Africa, some of that growth, or
DS: Just to sum up then, where do you think prices are headed? I mean, they’ve clearly risen very strongly so far. Where do you think they might be going during the rest of this year, for instance?
GM: Okay. Well, the biggest annual price settlement is for coking coal, and largely out of Queensland and out of Canada. They settle below $100 FOB, Canada and Australia last year. I believe there is a chance that they will double in prices to the 190s, the 210s. I think that there’s already a chronic shortage, for all sorts of reasons, and I think that has become a truly critical situation.
You’ve got very high steel prices and people are going to face the prospect of not being able to make steel. All over the world, all sorts of customers, if they’re not going to get their coke—their coking coal tonnage—they’re just not going to be able to make steel.
So I think you could conceivably see a doubling in price of coking coal.
On steam coal, which a year ago was down in the 50s out of Australia, out of South Africa, we’re already up to 110-115. I think that there is no reason to see that that limit is anywhere in sight. I think that those FOB prices could go up towards 150. I see absolutely no reason why not.
DS: Gerard McCloskey, thank you very much for talking to me.
You’ve been listening to a podcast from lastoilshock.com, sponsored by Global Public Media, public service broadcasting for a post-carbon world.