Eskom and Transnet woes drag coal sector down

Exxaro’s results for the year to December 2023 tell the story of a coal sector battling what economists refer to as structural bottlenecks, mainly Eskom and Transnet.

Fix these two state-owned companies and the results would without doubt have been a whole lot better. Exxaro’s coal exports are now at their lowest levels since 1992.

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SA had to watch the commodities boom of the past few years from afar, unable to fully participate because Transnet couldn’t ship the required volumes, and Eskom’s declining coal demand mirrored the load shedding schedule (hitting an all-time high of more than 330 days in 2023).

The chart below shows what has happened to coal and iron ore prices since 2022, and the dwindling volumes processed through the Richards Bay Coal Terminal (RBCT), which last year handled about 47 million tons (Mt) against a design capacity of 91 Mt. That’s roughly half what the terminal is capable of handling.

Exxaro turned in a respectable performance given the multiple challenges it faced, and will have to rely even more on management agility to weather the inevitable storms that lie ahead.

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Shareholders will be pleased with a special dividend of R5.72 on top of an ordinary dividend of R10.16 per share.

These are the rewards for cautious cash management. The company is lightly geared with far more cash than debt, allowing for a bonus payout to shareholders.

The company clearly anticipated falling commodity prices and declining coal offtake by Eskom. It held capex of around R2.4 billion, mainly for the maintenance of existing operations.

Revenue for 2023 was R38.7 billion, which is 17% less than the previous year, but that’s still 50% higher than 2019, just before Covid. That’s when energy and coal prices spiked as developed nations stocked up on energy supplies in anticipation of a cold winter. They spiked again at the beginning of the Ukraine conflict but are now back down to the historic mean.

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The reason for the drop in revenue was reduced Eskom demand and lower exports – they were down 2% due to domestic logistics constraints. The need to find alternative transport channels to market contributed to mine inflation of about 16%, which is almost double consumer inflation for the year. Mine inflation is a worry, not just for Exxaro but for the entire sector, as supplies are imported at weaker and weaker exchange rates.

Seleho Tsatsi, investment analyst at Anchor Capital, notes that Exxaro had net cash of R43 a share at the end of 2023, equivalent to about a quarter of its market cap.

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“So, Exxaro has declared a R5.72 per share special dividend, bringing the total FY 2023 dividend to quite a sizable number. Coal net operating profit was down 40%, mostly because of lower export coal prices. Coal sales to Eskom were also hit by offtake disruptions. This was partially softened by stronger iron ore profits. At the moment, lower iron ore prices, which are down about 20% so far this year, and subdued export coal prices are headwinds in the short-term.”

Thungela

Thungela’s 2023 year-end results will be out next week, but we already have a pretty good idea of what’s coming.

A February trading update said the market should brace for a drop of R88-R90 drop in earnings per share, which are likely to end the December 2023 year at R34-R39. These numbers include various once-off, non-cash adjustments related to the acquisition of the Ensham Business in Australia, part of the group’s plan to diversify its earnings base.

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“Continued underperformance on the part of Transnet Freight Rail (TFR) has again hampered our ability to operate optimally,” said Thungela at the June interim stage in 2023.

“TFR achieved an annualised run rate of 48 Mtpa for the industry in the first half of 2023, a deterioration of 13% compared to the 55 Mtpa run rate achieved in the first half of 2022.

“TFR suffered two derailments in May 2023 which cost Thungela at least 340 000 tons in rail capacity.”

The group reported a stabilisation in TFR freight services in the second quarter of last year following collaboration with the coal industry.

Outlook for coal

The outlook for thermal coal depends on China to a large extent, and an overhang of stock. South Africa has plenty of surplus coal and is offering heavy discounts to overseas customers, according to a report by S&P Global.

S&P Global noted that European coal generation fell sharply in 2023 as gas prices declined and “the space for fossil fuel generation shrank, with 2024 likely to see little upside”.

Analysts believe US thermal coal exports in 2024 will lag 2023, and there’s upside potential as US suppliers target growth in India and other South Asian and Southeast Asian markets.

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Coal miners expect the stock overhang to reduce in the course of the year, allowing for a measure of price stability to return. The challenge will be to get costs under control and reduce mine inflation running at more than double the increase in consumer prices – not an easy task.

This article was republished from Moneyweb. Read the original here