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Investigating the outcome for South African coal supply to the domestic market when faced with declining demand for exported coal

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Abstract

This paper investigates the implications for coal supply security for the domestic South African market when faced with weaker export demand. It expands on a previously introduced model of domestic coal trade, DOTRAMOD, by accounting for mining profit, the opening of new mines and the closing of loss-making mines. The results indicate that declining demand for exported coal would result in declining profits for multi-product mines. This would lead to the closure of some mines and reduced coal supply to domestic power producers. These results highlight the importance of the mine investment problem in commodity market studies.

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Notes

  1. This is typically the production cost plus a margin for the mine operator.

  2. In Rademeyer et al. (2020b), each of these customers consumes a different coal product, i.e. lower grade (LG), higher grade (HG) and mid grade (MG) respectively. In Rademeyer et al. (2020b), coal grade refers to the energy content such that a higher grade is associated with a higher energy value.

  3. A simplified version of DOTRAMOD is described here. The operating horizon is denoted by T. r is the discount rate. \(P_{t}^{LPS}\), \(P_{t}^{DIU}\), and \(P_{t}^{EXP}\) are the landed prices of LG, HG and MG coal respectively, while \({x_{t}^{j}}\), \({x_{t}^{k}}\) and \({x_{t}^{i}}\) are the volumes sold to power stations, domestic industries and exporters respectively. Also, \(x_{t}={x_{t}^{j}}+{x_{t}^{k}}+{x_{t}^{i}}\). Furthermore, \({P_{t}^{M}}\) is the price at which the trader purchases coal from the mines, and Tt denotes transport cost to end-users. A take-or-pay penalty, TOP_PENALTY, is paid for unused transport capacity.

  4. Unfortunately, a more recent review is not available. However, given that the mining industry is rather conservative, it is likely that these figures have not changed much.

  5. Geometric Brownian motion (GBM) and MR are typically used for simulating commodity prices; however, MR seems to be more appropriate for longer life projects. This is based on the assumption that in the long term, market prices tend towards the average production cost (Savolainen 2016).

  6. The codes are not in a [0,1,2,3] sequence because it was initially thought to include “care and maintenance” as an additional stage that could be undergone between each of the four stages here mentioned. It was not however found that the inclusion of a “care and maintenance” phase would contribute meaningfully to this research, and so it was omitted.

  7. This is always set equal to the number of markets. The products that are then not produced by a particular mine are set to 0.

  8. Tonnes per annum, i.e. a unit of coal production capacity

  9. The maximum price Pmax is the price at which demand by the buyer for the product is zero. The maximum demand Dmax is the maximum intake in MJ where after P = 0, i.e. no price decrease could induce more buying.

  10. The graphical representation is in MJ to allow for direct comparison of the three products. However, these quantities would equate to about 110 mt of export product and 240 mt of LPS product respectively.

  11. Supply does not equal sales. Supply is “available for sale”.

  12. The heating value for each product remains constant for all periods and all scenarios. Hence, the trends are the same whether shown in joules or tonnes.

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  1. School of Mining Engineering, The University of the Witwatersrand, Johannesburg, South Africa

    Maryke C. Rademeyer

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Rademeyer, M.C. Investigating the outcome for South African coal supply to the domestic market when faced with declining demand for exported coal. Miner Econ 34, 441–453 (2021). https://doi.org/10.1007/s13563-020-00245-0

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