Coal price fall threatens local miners

What you need to know:

During the past few months, two cement companies – that use coal as a source of the energy needed to produce cement – were on record as having imported at least 60,000 tonnes of coal from South Africa, leaving local miners desperate for a market where they can sell theirs.

Dar es Salaam. A drop in coal prices in countries like South Africa is threatening the existence of seven local miners as factories that make use of the fossil fuel prefer importing the products to sourcing them locally.

During the past few months, two cement companies – that use coal as a source of the energy needed to produce cement – were on record as having imported at least 60,000 tonnes of coal from South Africa, leaving local miners desperate for a market where they can sell theirs.

In June 2014, Maweni Limestone Limited, a subsidiary of ARM Cement Limited (Formerly Athi River Mining Ltd), imported 50,000 tonnes of coal from South Africa as part of its preparations to commission its cement factory in Tanga.

Similarly, the Dar es Salaam Stock Exchange (DSE)-listed Tanga Cement Company Limited (TCCL) which was previously sourcing its coal locally, is on record as having started importing thermal coal for its Tanga-based plant from the Rainbow Nation.

The ministry of Industry and Trade is aware of the importation, noting that the development was posing a threat to local miners. The government cannot prohibit importation of the product as long as it follows the right channels since it comes as a raw material

“Coal is imported as raw material and hence it is not taxed….this makes imported coal to formidably compete with ours,” the permanent secretary in the ministry of Industry and Trade, Mr Uledi Mussa, told BusinessWeek.

Firms are tempted to import due to a drop in prices in South Africa and logistics disparities between Tanzania and Africa’s second largest economy (after Nigeria), at least according to the project coordinator and director of cement production at Maweni Limestone Limited, Mr Sudheer Khagram.

“It is logistically very challenging for us to access coal from local sites like Ngaka,” he explained.

Sources privy to the industry, say to access a tonne of coal from the southern part of Tanzania to Tanga will cost one around $127.50 whereas the same costs a total of $109 if imported from South Africa via Tanga Port.

The expensiveness of Tanzania’s coal is largely on challenges associated with transport as basically, a tonne of coal costs $47.5 in Tanzania but one has to foot another $80 as costs for transporting the coal to where the plant is.

On the contrary, one pays $59 per tonne of coal in South Africa. The buyer will have to pay another $50 to transport the same by water to Tanga. This means importing from South Africa helps factories to save $18.50 per tonne of coal.

Local coal miners say they fail to compete with imports largely because their operations are also exposed to extra costs like royalties and taxes.

“We are afraid that if we allow the trend to continue, it could attract other companies to import and when that happens, it will hinder investment in Tanzania’s coal extractive industry, with consequent job losses and lower government revenue,” said a source, preferring anonymity.

Apparently, with nothing prohibiting cement firms from importing coal, the only place they could go to is to the National Environment Management Council (Nemc) which deals with compliance to environment associated with industrial undertakings.

Environmental impact

A Nemc director of environmental compliance and enforcement, Dr Robert Ntakamulenga, told BusinessWeek that Maweni Limestone Limited had indicated in the environmental impact assessment report that it could source coal outside.

NEMC issued the permit to the company to import coal as indicated in the reference EC/EIS/65.

On the contrary, TCCL’s case involved violation of commitment the company made when submitting its environmental impact assessment report whereby it committed itself to sourcing the products locally.

“TCCL had indicated that would be sourcing coal locally, but later it started importing without submitting the variation report showing their intention to import so that we could give necessary conditions to comply with,” said Dr Ntakamulenga.

It is just recently that the firm applied to Nemc so it can start importing coal from South Africa.

The cement firm says locally extracted coal has more ash content than South Africa’s.

From the environment point of view, there was a challenge in monitoring the offloading of bulk coal into barges at Tanga Port. Nemc believes poorly handled, this could cause spillage and pollution in the sea since coal is transferred from the ship via flat-bottomed boats to the port.

According to provisions of the Environmental Management Act No. 20 of 2004 (EMA, 2004), coal is regarded as one of the hazardous materials whose importation can only be effected with approval from Nemc.

And according to Dr Ntakamulenga, unloading of a coal ship at sea is a poor standard environmental practice because of its potential to contaminate the marine environment.

Mr Mussa disputed quality claims of locally-sourced coal, saying Tancoal - a joint venture between the National Development Corporation (NDC) and Intra Energy Tanzania Limited – produces one of the best coals in Africa.

“Locally sourced coal is suitable for industrial activities as its steam value is 6,000kcal/kg the same or higher than that of South Africa. Its ash value is also equivalent and it has been used successfully by local companies for the past few years,” he said.

In 2011, a working paper ‘The Future of South African Coal: Market, Investment and Policy Challenges’ raised concern over the country’s industrial important material for heating (coal).

It found that though ash content varies from mine to mine, however, some are as high as 65 per cent.

In his paper, Anton Eberhard, said export grade coals generally require washing so that their ash content does not exceed 15 per cent.

He said heating value of export coals of around 6,200 kcal/kg, net as received were common, but average value is declining and some export coals are now around 5,900kcal/kg.

Analysts say importation of coal is not illegal if it complies with environmental regulations, however, that exercise has enormous financial repercussions on the general economy.

For example, with just 60,000 tonnes, the government lost an opportunity to collect royalty to the tune of Sh153 million. This is because local miners would pay three per cent as royalty if the 60,000 tonnes were to be sourced locally.

Besides, if the consignment was to be sourced in the country, transporters could earn Sh7.7 billion, taking that a tonne of coal was to cost $80 in transport and the exchange rate by that time being Sh1,600 per dollar.

Tanzania has the potential to feed its industries from its huge coal reserve estimated to be in the region of 5 billion tonnes, enough to supply all industries including power generation for more than 100 years.

Currently, Tanzania’s annual coal demand stands at 500,000 tonnes, which if sourced in the country will attract three per cent royalties from coal mining companies and the government will earn Sh1.2 billion while transporters would pocket Sh68 billion.

Taxing

According to Mr Mussa, the government is studying both short and long term measures to address the situation in a manner that will bring a win-win situation to all parties (the government, coal miners and companies that utilise the product).

In the short term, the country may start taxing imported coal. “We may push for a review of some taxes under the East African Community Custom Union so we can impose tax on coal to protect local coal industries,” he said.

In the long term, the country is working on ways to in place an effective and functioning railway system so that the cargo is delivered through cost effective means.

These measures seek to protect Mchuchuma, Kiwira, Offroute Mtuli, Rukwa, Tancoal Energy, Tanzacoal and Eddenville coal mines in Tanzania.

Mr Mussa also calls upon cement companies to come up with ideas to help address issues that force some companies to import coal instead of sourcing it locally.

The government decided to form a joint venture company to ensure coal is available for local industries, which could also have backward and forward linkages in the economy.