'BHP threatens Eskom over money'

"There have been discussions which have been getting uglier for the past few weeks. BHP isn't prepared to deliver coal of a higher specification than it needs to unless it's paid more," one industry source said.

Billiton has had fixed price supply contracts to Eskom's Hendrina and Duvha power plants which have lost substantial sums over the past several years as BHP's costs have risen but the price for coal has remained the same.

BHP's Optimum mine, which supplies about 6.5m tonnes a year of coal to Eskom's Hendrina plant recently changed hands. A black economic empowerment consortium now owns and operates the Optimum mine and will be supplying coal to Eskom under more favourable terms than BHP's contract.

Eskom has found the quality of coal delivered by BHP, in terms of its calorific value, size and ash content, has deteriorated over the past few years, industry sources said.

Eskom has had handling problems with fine, powdered coal delivered to its Hendrina and Duvha plants because dry fines blow away from the conveyor belts and wet fines cause the system to clog and have a lower energy content.

Eskom needs homogenous coal in lumps of 30-50 millimetres ideally and its plant managers have insisted on a minimum calorific value, the sources said.

But the contracts between Eskom and BHP do not specify the size of coal lumps or preclude the delivery of fines, the sources said.

BHP 'threatened' Eskom

BHP has delivered coal within its contract specification but Eskom needs a higher specification coal.

BHP has sought higher prices for its coal but Eskom has so far refused to consider paying more, the sources said.

"They (BHP) did threaten to halt supply but that's very unlikely to happen," another industry source said.

BHP has threatened to interrupt coal supply to Eskom power plants after a long meeting with Eskom at which Eskom refused to consider re-negotiating the contracts at higher prices but BHP is unlikely to carry out this threat, they said.

An Eskom spokesman said BHP has not interrupted any coal deliveries to date. BHP declined to comment.

Eskom has had to pay around R300 a tonne free-on-truck for unwashed, crushed run-of-mine coal intended for export, to blend with BHP coal which was too fine or too low in c.v. to be used alone.

Eskom has this year signed new term supply contracts for domestic grade coal at around R150 a tonne FOT, double 2007's contract prices.

BHP's export coal operations in South Africa have become extremely profitable thanks largely to the rise in international export coal prices last year, coal market sources said.

But BHP is still losing money on its old supply contracts with Eskom, some of which have another 15-20 years to run.

- Reuters