Financial market and economic trends
In the final quarter of 2007 and in early 2008, global financial
markets were dominated by liquidity concerns as a result
of the United States housing market credit crunch. As the
liquidity concerns spread from the banking sector to the wider
real economic sector, the American economy increasingly
threatened to dampen world economic growth prospects. A
crumbling housing market, increasing energy costs and rampant
food inflation all contributed to a real reduction in the level of
consumer demand. Weaker economic growth prospects in the
United States, weighed heavily on the US dollar.
The possibility of a hard landing in the US economy, and growing
concerns about the global credit crunch propelled leading central
banks across the globe to inject liquidity in the financial markets.
This was done in the form of direct injections, rescue packages
for troubled financial institutions and softer interest rates. The
US Federal Reserve was particularly aggressive by reducing its
key lending rate from 5,25% in August 2007 to 2% to date. The
challenges faced by the US economy and increasingly softer
interest rates, drove the US dollar to an all-time low against the
euro. Although a weaker US dollar raised hope of a correction
of the US trade balance against the rest of the world, it also
increased the risk of higher energy and food inflation.
A weaker US dollar also meant that commodity prices were
pushed higher, at least in absolute US dollar terms. Oil prices
continued to set new record levels with precious metals such as
gold also rising to historic levels.
South Africa was also subjected to higher energy and food
inflation. Faced with higher inflation and rising household debt
levels the South African Reserve Bank gradually increased interest
rates to maintain price stability. Although economic growth has
been robust in recent times, averaging above 5,00% during the
last four years, higher interest rates, slowing consumer demand
and increasing infrastructure bottlenecks could result in a slower
rate of economic growth in the coming quarters.
| South Africaís coal production shortfall should there be no increase
in coal production and the
capacity at RBCT is implemented
as planned and fully utilised.
Source: Eskom forecasts, South African coal statistics 2007
Higher inflation expectations have translated into some weakness
in the domestic capital markets. Given the broader infrastructure
initiatives across the economy, and thus the funding requirements,
the capital markets could remain under pressure. On the positive
side, the government anticipates budget surpluses in the coming
fiscal years which could limit its participation in the capital
markets and thus free capital for use by parastatals among others.
Direct capital injections by the state into Eskom have also been
an unprecedented feat, highlighting the overall challenges and
opportunities from a developmental point of view.
Supplier and industry trends
Impact of global expansion in the power sector
During the last year, the economy experienced extreme
turbulence coupled with ever-rising primary fuel costs, commodity
price increases and numerous interest rate hikes. The expansion
programmes in India and China increased demand for utilityspecific commodities. All these factors increased pressure on
utilities to secure supply, while at the same time containing costs.
Market signals indicate further turbulence in the markets during
the months to come. Supply market volatility has seen suppliers
struggling to meet demand. While capacity was increasing
it was not keeping up with demand, leading to an increase in
quality issues, prices and delivery lead times. As supply tightens,
traditional suppliers are increasingly declining to bid, thereby
increasing the need for global sourcing.
The global drive to increase electricity supply capacity, particularly
in India and China, has resulted in a growing local and international
demand for scarce technical skills both on the operating and
Global coal demand trends
Globally, coal is the fastest growing energy source. Demand for
coal is soaring, especially in the Indian and Chinese markets. With
increased demand, global coal prices are following the escalating
oil price and the South African coal export price at the Richards Bay Coal Terminal (RBCT) recently broke through USD115 per
ton, up from USD53 per ton at the beginning of 2007. This puts
pressure on Eskom’s short-term coal price and volumes.
The quality of coal required by importers is declining, particularly
in respect of the Indian coal market. This makes many current
coal sources and, more importantly, potential future sources, with
some beneficiation, attractive to the export market. Such coal
was, historically, only suitable for the Eskom market.
South African coal production growth
The low growth in South Africa’s coal production is of very great
concern and poses a serious supply risk to Eskom and South
Africa. If there is no intervention, South Africa may face an annual
coal shortage of up to 100Mt by 2017.
Eskom purchases its water at first-tier level from the Department
of Water Affairs and Forestry (DWAF) directly via abstraction
from state-owned water works or through intermediaries, for
example, in the case of Lethabo Power Station, through Rand
Water, and Matimba Power Station through Exxaro. DWAF is
reviewing the institutional arrangements for the supply of water
and is expected to establish the National Water Resource
Infrastructure Agency (NWRIA), which will develop, operate and
maintain all bulk water infrastructure of national importance at
Environment and climate change
Eskom is controlled by various independent regulators including
the National Energy Regulator of South Africa (Nersa) and the
National Nuclear Regulator (NNR), the Department of Water
Affairs and Forestry as well as the Chief Air Pollution Control
Officer (Capco) from the Department of Environmental Affairs
and Tourism (DEAT). These independent regulators protect the
public interest and regulate Eskom’s activities to ensure effective environmental protection. This is achieved, among others,
through the issuing of authorisations for construction,
permits and licences for particulate emission releases
and water usage.
South Africa is a signatory to the United Nations
Framework Convention on Climate Change (UNFCCC)
and its implementing mechanism, the Kyoto Protocol. As
a developing country, there are no binding obligations
as yet for South Africa to reduce greenhouse gas
emissions. However, there is increasing in-country
commitment for development to be carried out in
a sustainable manner that will result in benefit to the
economy, society and the environment and that is
compatible with actions required to combat climate
change. It is important that South Africa actively
contributes to global efforts to combat climate change
while ensuring the sustainability of the economy and
||Click here for more on the environment and climate change.
| Recent investment trends in South African coal mining.
Source: Dr Azar Jammine
Electricity distribution industry restructuring
In October 2006 Cabinet approved the proposal to
create six regional electricity distributors (REDs) to
consolidate the electricity distribution businesses of the
municipalities and Eskom. These REDs are to be established
as public entities, accountable to the Department of
Minerals and Energy. Electricity Distribution Industry
Holdings (Pty) Limited is responsible for implementing
government’s restructuring policy. The critical next steps
include the finalisation of outstanding policy issues and
the drafting of enabling legislation.