Investors lose appetite for coal

Investors are increasingly losing their appetite for new coal projects as an oversupply of coal in world markets is forcing many of the large producing countries to reduce production while urgently looking for new markets.

XMP Consulting analyst Xavier Prevost said the trend is problematic for the likes of South Africa, where more coal is actually needed.

"Investors are not keen to invest in coal at the moment, which makes it difficult for any project to get off the ground. At the moment, South Africa has almost no hope to draw investment for new projects, not only because of what is happening in the world markets but also because of what happened at Marikana and is happening on other South African mines," he said.

Prevost said companies with strong black empowerment credentials such as Shanduka, Kuyasa and Liketh are still good investment options to consider.

South Africa is currently building two big coal-fired power stations, which means it will still need coal for at least another 50 years.

Coal is predominantly mined in Mpumalanga but, as this resource dries up, plans to mine the Waterberg coalfields are becoming more attractive.

Xavier said the main obstacles to mining coal in the Waterberg relate to water shortages, infrastructure and now negative investor sentiment.

"Unless the local or central government make a number of big investments, these problems will not be solved and the potential coal resource in the Waterberg will remain just that," he said.

The rest of the world is urgently looking for new markets as coal loses market share to natural gas in power generation, especially in the US.

Increased production of shale gas has seen a drop in prices of natural gas and left many coal plants idle. This has resulted in the US, the world's second-largest producer of coal, flooding the world market as it opts to sell excess coal to the EU, China and India, where demand had also tapered down.

This has resulted in prices plummeting. Thermal coal prices have fallen from a high of $220ton in 2008 to around $85ton currently.

Prevost said South Africa is somewhat protected from lower prices owing to the devaluation of the rand.

To rebalance the market, large coal producers such as the US, Indonesia, Australia and Russia have started to cut production.