Eskom issues coal suppliers with force majeure warning

South Africa's state-owned utility Eskom has issued a warning to its coal suppliers that it might declare force majeure on its supply agreements

Eskom sent a letter to its suppliers on 17 April to inform them that it will not necessarily be taking the full contractually agreed coal volumes. This will apply from 16 April until one month after the national lockdown has been completely lifted.

Electricity demand has dropped by 7,500-9,000MW since the government implemented an economy-wide lockdown on 27 March to contain the spread of the Covid-19 virus.

Exxaro and Wescoal have notified their shareholders of Eskom's warning. As the utility did not indicate the extent of the reduced offtake, the potential impact is not yet quantifiable.

A decision by Eskom to lower its offtake would affect Exxaro's supply of 22mn t/yr coal to the Medupi and Matimba power plants from its Grootegeluk mine.

Based on counsel from its legal advisers, Exxaro said the event that triggered Eskom's warning does not constitute force majeure as stipulated in the coal supply agreements. This is because the utility's power plants are still capable of supplying power, it said. The firm plans to "vigorously" defend its position and take the necessary action.

Exxaro also said Eskom's move is not in the spirit of President Cyril Ramaphosa's call on businesses to continue paying contractors. "Exxaro will engage with Eskom to discuss this matter and seek a mutually acceptable resolution," it said.

Wescoal supplied 3.5mn t of coal to Eskom in the financial year to 31 March.

The lockdown is meant to end on 30 April, but it will be phased out gradually and the economic impact will be felt for months afterwards.

The South African Reserve Bank expects the country's GDP to shrink by 6.1pc this year, compared with a 0.2pc decline that it forecast before the lockdown was implemented.

The decline in power demand is expected to cost Eskom around 2.5bn rand/month ($130mn/month). But this does not take into account the potential demand destruction of businesses going under in the coming months, Eskom said.

The decline in power demand brought by the lockdown has allowed Eskom to double its short-term maintenance.

But South Africa's border closures and restrictions on the movement of goods prevented it from importing the components needed to carry out long-term repairs or fix the design faults of its Medupi and Kusile power plants.

The maintenance undertaken over the past few weeks could help shield the utility against the need to immediately resume controlled power cuts once the lockdown is lifted. Nevertheless, Eskom sees a moderate risk of load-shedding returning in July, which will add to South African businesses' woes.

Eskom burns around 120mn t/yr of coal, or 46pc of domestic production.

by Elaine Mills