Volatile commodity markets and poor rail performance continue to affect mining industry

FD Riaan Koppeschaar reveals the impact of global economic shocks on Exxaro’s performance.

During the first half of the 2022 financial year, a series of global economic shocks, including the Russia-Ukraine war and new Covid-19 lockdowns in China, have further disrupted supply chains, fuelled inflation, and slowed economic growth.

After a strong 2021 finish, global economic growth slowed in the first quarter of 2022 and stalled even more in the second quarter of the year. The global economic expansion lost momentum following a 3.4 percent contraction in 2020, and a strong 5.8 percent rebound in 2021. Global real gross domestic product growth is likely to slow to 2.9 percent in 2022.

This is according to Exxaro FD Riaan Koppeschaar, who explained that as a result, the impact on commodity markets was mixed and volatile throughout its six-month reporting period, ending 31 December 2021.

Coal price highs and lows
“The Russia-Ukraine war and Europe’s quest for alternative suppliers of especially high-quality thermal coal continues to drive the shortages,” he said. “Seaborne thermal coal prices rebounded upward as several governments firmed plans to sanction Russian coal imports. The European Union approved an alternative coal supplier plan, effective after mid-August 2022, while Japan announced alternative plans without an effective date. These geopolitical developments were the single most critical factor that influenced the energy complex markets during the first half of the 2022 financial year.”

“In respect of Exxaro’s key commodities, the API4 coal export price is expected to average $270 (R4,422.28) per tonne and the iron ore fines price $142 (R2,326.97) per dry metric tonne cost,” Riaan said in a financial statement.

“During the period, international coal prices reached a record high primarily driven by the Russia-Ukraine war. Global trade flows were affected, resulting in increased demand from Europe for South African high-quality coal, as alternative supply sources were sought to reduce dependency on Russia.”

However, he explained that, in contrast to the increased demand from Europe, the resultant high coal prices reduced demand from Asia, especially from India and Pakistan, due to affordability factors. “The domestic market has also been impacted by the higher export price, as the improved attractiveness of alternative export distribution channels allow for domestic volumes to be sold in the international market. The resulting domestic supply tightness has resulted in a higher domestic price outlook.”

Off the rails
Additionally, poor locomotive availability, derailments, and instances of cable theft and vandalism have resulted in a decline in Grootgeluk’s train performance from an average of five trains per week in 2021 to four. The Mpumalanga export rail performance also declined from 15 trains per week in 2021 to eight.

“Poor rail performance continues to put a strain on the mining value chain and our ability to produce at optimal levels,” Riaan said. “We continue to engage with industry and Transnet Freight Rail on initiatives to improve overall operational rail performance and are exploring various logistics initiatives to mitigate this constraint.”

He added that Exxaro’s operational excellence programmes, especially its overall equipment effectiveness and cost optimisation drive, continue to focus on improving efficiencies in the mine’s value chain. These programmes aim to reduce the impact of the rail challenges and cost pressures experienced across the mining industry.

“To remain competitive across various markets, our digitalisation programme remains focused on the visibility of the full value chain enabling our market to resource optimisation strategy through timeous insights-driven decision-making. Our data science initiatives are making good progress focusing on enhancing these insights using data and advanced analytics in critical areas of the business.”

Riaan concluded that coal production is expected to increase by one percent and sales volume to decrease by three percent, mainly due to logistical constraints and the disposal of Exxaro Coal Central (ECC) operations on 3 September 2021.