Is Africa still the right investment for coal?

by Ina King (Potgieter) January 25, 2021

It is not surprising that investors are hesitant about the future of coal. Globally, pressure is mounting for governments to commit to the net zero emissions agenda, and to meet decarbonisation targets. Countries and organisations that previously funded the building or operation of coal-based power plants have changed course and have pledged to stop all funding for coal projects. Added to this, researchers estimate (confidently) that within the next few years, renewable energy production will be significantly cheaper than coal-fired energy production, lending yet more impetus to the renewable energy migration.

In spite of this, coal remains a viable investment for a number of reasons. Among these:

• Demand for coal has not declined as expected. The International Energy Agency (IEA) 2021 Coal Report found that while we expected demand for coal to decline in 2020, demand exceeded coal production and some countries experienced electricity shortages as a result. Furthermore, the report estimated that global coal demand would grow by 6% during 2021, to the record-highs of 2013/2014.
• Demand for electricity is growing fast (especially in China, India and Africa), and coal-fired power generation is still the most economical option in those countries.
• The steel and iron production industries rely on coal for production (with no alternatives available).

Africa’s coal opportunity

The IEA found that total coal consumption in Africa dipped by 10% in 2020. Yet Africa’s coal producing countries – namely Botswana, Tanzania, Zambia and Zimbabwe – are still planning to expand their coal mining operations, to meet the growing domestic demand for power. In fact, it’s been reported that Africa plans to establish 25 new coal power plants in the next few years. There is a significant opportunity to cash in on the export of coal for energy or the mining of coking coal (required by the steel industry).

Consider, too, that:

• Botswana’s government is supporting coal exploration and the establishment of a rail link with South Africa, to make the most of the export market. In fact, while South Africa’s government has committed to reduce the use of coal (in line with global targets for reduced CO2 emissions), it will continue to issue new licences for coal mining operations.
• Zimbabwe’s government has planned to build more coal mines to generate more domestic power and to create more jobs.
• In Zambia, revisions to tax law make investment in the mining sector more attractive. It’s expected that this will bolster the country’s economy.
• South Africa has received commitments for financing to the tune of US$ 8.5 billion over the next five years, to enable it install renewable energy sources and reduce its reliance on coal power. This is a process that will take several years. Currently, South Africa accounts for 90% of the coal consumed in Africa.

Indeed, a number of new coal mining projects in Africa were reliant on financial support that is now being rescinded as large companies take steps to meet environmental governance (ESG) criteria. However, as has been noted in the media, the release of these assets/projects by investors has resulted in their under-pricing. These assets are going cheap but will deliver great returns for investors not bound by ESG mandates.