COLUMN-Don't hold your breath waiting for Mozambique coal: Clyde Russell

Thu Nov 22, 2012 1:07am EST

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

MAPUTO, Nov 22 (Reuters) - If Asian buyers expect significant quantities of coking and thermal coal to come to market from Mozambique within the next few years as scheduled, they are likely to be disappointed.

The southern African nation has ambitious plans to export as much as 100 million tonnes a year, much of it high quality coking coal, providing steel makers in China, India, Japan and elsewhere in Asia a lower-cost alternative to current suppliers, dominated by Australia, Canada and the United States.

But it's clear from talking to miners, rail and port operators and contractors at the Coaltrans Mozambique conference in the capital Maputo this week that the plans are still a long way from reality, and are extremely unlikely to be delivered on time or even on budget.

There is no doubt that the coal reserves in Tete province are extensive and relatively easy to mine at costs competitive with other producing nations.

But similar to Australia and Mongolia, the real challenge is getting the coal long distances through often harsh terrain to the coast, and then Mozambique is doubly challenged by a lack of suitable deepwater ports capable of handling capesize vessels.

Mozambique will likely export somewhere between 3 and 4 million tonnes of coal this year from mines in Tete, where virtually all of the new planned mines will be located.

The country does ship coal from Maputo, in the south, but this is sourced from South Africa, Zimbabwe and Botswana.

Currently coal from Tete's mines, operated by Brazil's Vale and Rio Tinto, undertakes a fairly torturous journey of almost 600 kilometres (360 miles) by a combination of truck and rail to the port of Beira, in the central region of the country.

Even when it gets here, the logistic challenges continue, as the port is shallow, meaning that coal is barged out to a sea to be transhipped onto larger vessels.

The Sena railway that links the coal area of Moatize in Tete to Beira is currently being upgraded after being damaged and neglected during a lengthy civil war that ended in 1992.

The restoration of the line was supposed to have been completed by now, but has been delayed, showing if nothing else the challenges of working in a remote part of Africa, where roads are poor and the many rivers subject to flooding in the wet season.

It is hoped that the line will be able to transport 6 million tonnes of coal per annum from the start of 2013, and double that within five years.

But even a capacity of 12 million tonnes a year is a spit in the bucket of what Mozambique wants to export, and there are plans for two more rail lines to link the mines to the port of Nacala in the nation's north.

One rail line, which goes through the part of Malawi that juts into Mozambique, already exists but is in need of extensive rehabilitation.

Vale is currently planning on doing this work, while ENRC, the London-listed Kazakh miner, aims to build a second line around the bottom of Malawi to Nacala with a capacity of 40 to 60 million tonnes per annum.

The existing line is just under 1,000 km while the proposed second line would be more than 1,000 km.

While Nacala is a deepwater port, a coal-export terminal capable of handling the planned volumes still has to be designed and built.

FUNDING QUESTIONS

While the engineers at the conference were confident that these infrastructure projects can be built, the major question mark has to be over the funding.

Company executives are generally reluctant to be pinned down on capital expenditure, but the upgrading of the two existing rail lines and the building of a third would cost at least $12 billion, according to Rosario Mualeia, the president of state-owned rail company CFM.

That figures doesn't include the billions more needed for port infrastructure, mine construction and the provision of services necessary to keep the whole chain running.

All this money can be found, but only if the economics stack up, and here the recent price declines for coal are making the project finance providers considerably more cautious.

One executive at an Indian steel company with interests in Mozambique coal mines said that unless the coal can reach the ports at a free-on-board cost of under $100 a tonne, then the mines aren't currently viable.

Another contractor at the conference, speaking off the record, said that getting the coal to port at less than $130 a tonne will be a challenge in Mozambique.

This means that coking coal is just viable, given its current price around $150 a tonne, but the slim margin means financing in the current climate is going to be hard, if not impossible.

What this all adds up to is delays and more delays, making Mozambique very similar to Australia, where ambitious plans to develop new basins such as the Galilee in Queensland state have been quietly placed on the back burner.

There is no doubt Mozambique has the potential to become a major supplier of coking coal, and its geographical proximity to India in particular, as well as a government that is seemingly more investment and tax friendly that Australia or Indonesia, stand it in good stead.

But the infrastructure challenges are significant and expensive to overcome. As one engineering contractor put it: "There is no way these projects will be done on time and on budget."

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