The true price of coal and steel
Strip mining the future
The fiscal, environmental and social costs of the Musina-Makhado SEZ heavy industrial zone, twelve new open-cast coal mines and mega-dam on the Limpopo River will be commensurate with the scale of the steel colossus itself and far exceed the benefits.
The profits for South Africa will be meagre, the toll immense.
Counting the costs
of natural capital depletion
The MM-SEZ will cost the SA fiscus US$22 billion to develop. The poorly-assessed externalised costs of the project will dwarf even that mind-boggling sum. Contrary to full cost accounting principles, none of the costs listed here has been:
properly quantified,
expressed in monetary terms and
deducted from the projected gross returns.
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The MM-SEZ is located in the Vhembe Biosphere Reserve, which has been inscribed by UNESCO in recognition of its outstanding biodiversity value.
Pollution from the noxious industrial zone and new coal mines that will supply it, will inevitably lead to severe severe and irreversible environmental degradation, biodiversity loss, damage to ecosystems and ecosystem services and destruction of natural capital.
Quite apart from CO2 emissions, coal mining and coal combustion have other highly negative environmental impacts: Sulfur dioxide, nitrogen oxide and mercury emissions, and the aftermath from sludge, slurry and fly ash ponds that contain a variety of toxins, combine to poison the air, soil and water across a vast area beyond the sites of the mines and factories.
Places that play host to extensive coal mining and related heavy industry are among the most polluted on earth.
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The impact on water resources of the development of extensive coal mining as well as the industrial zones of the MMSEZ in this water-scarce region will be catastrophic.
The plan to supply the 125Mn m3/a water requirements of the SEZ from the Limpopo River and its tributaries, including the Mzingwane River in Zimbabwe, and from local groundwater sources, threatens the resiliency of the entire Limpopo River basin river system, and all other water users who depend on its water resources.
The loss and contamination of ground and surface water resources in Limpopo’s stressed catchments represents a threat to all other sectors, including farming, but it threatens the very survival of vulnerable rural households and small-scale farmers who depend on groundwater and run-of-river abstractions to meet their needs.
The Limpopo River basin is a transboundary water resource, and the threat this development indisputably poses to the basic human right to water access for downstream water users in Mozambique could translate into serious political risk as well.
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The MMSEZ is hyper-carbon intensive. The smelter alone will emit 1 billion tons of CO2e over its 30-yr life, 30Mt p/a – 10-14% of SA’s carbon budget, intensifying the climate crisis and jeopardising SA’s ability to meet its NDC commitments under the Paris Agreement.
The impact of the MM-SEZ on the emissions inventory of the country is thus rated as Very High in the EIA Specialist Climate Impact Assessment Report.
Consequently, the zone’s development will expose South Africa to the risk of ‘carbon leakage sanctions’ under the EU’s Carbon Border Adjustment Mechanism (CBAM), for example - Import tariffs are being imposed on certain goods, including iron and steel, from countries with lower environmental standards.
It’s worth noting that were full-cost accounting principles adhered to, at latest SCC (Social Cost of Carbon) rates - a widely recognised estimate of the marginal damage caused per ton of CO2-equivalent emitted - the MM-SEZ is objectively uneconomic:
The liability South Africa will notionally accumulate in the form of ‘climate debt’ - the amount owed under the polluter pays principle to other countries and to future generations by those who benefited from the emissions - will amount to a US$90billion/year (R1.35trillion/year) at the US$3000/ton rate, which is at the low end of the SCC range currently being employed.
With or without the coal-fired power plant, the MM-SEZ’s expected GHGs will contribute to global warming and climate destablisation and the development is fundamentally at odds with global and national efforts to de-carbonise the economy and undermines the Just Transition pathway and JET-P funding.
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The damage that the development of coal mining and coal-fueled heavy industry will inflict on other industries, especially on farming and tourism and the emerging biodiversity economy, as a consequence of pollution and the contamination of air, water and soil; the degradation of the wild character of the landscape and the loss of wildlife and wildlife habitat is near incalculable.
The development of the MMSEZ and and the coal mines essentially comes at the expense of all other sectors and will permanently destroy the carbon sink and biodiversity reservoir and their potential to create jobs, SMME opportunities, and livelihoods to benefit poor rural communities.
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The impact on the South Africa’s steel industry, currently surviving on tax-payer funded hand-outs, will be severe, threatening more job losses.
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Given the extraordinarily high capital requirements of the project, it will unavoidably impose a heavy debt burden on the national fiscus, despite the project’s extremely poor risk-return profile.
The cost that will be borne by the SA fiscus to build the dedicated infrastructure needed to overcome the immense handicaps of the location for redundant steel production capacity - US$22 billion.
The terms of the loans made under FOCAC remain undisclosed.
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The impact on vulnerable local rural communities, who typically grossly disproportionately suffer the consequences of industrial pollution and benefit least from the jobs created, will be significant.
In exchange for 20,000 promised jobs, the rural communities of the Vhembe who will host the development will bear much of the cost burden:
• Human health impacts of noxious industry will be high; food and water security is threatened by reduced yields on smallholder farmers and local extinction of wild harvested natural resources such as mopane worms, herbs and Baobab fruit; service delivery will be further strained by high inward migration;
• The cultural and heritage loss from the destruction sacred sites and ancestral burial grounds, and Mapungubwe World Heritage Site, is incalculable, and the trauma to deeply traditional Venda and Tsonga communities of rapid industrialisation and urbanisation will be intense.
• The MMSEZ and coal mines are driving a foreign land grab in the region and poor land-owning communities are being disenfranchised for little compensation, sewing much conflict within communities.
For a glimpse at the future for Limpopo’s Vhembe, you need look no further than the Mpumalanga Highveld. Images courtesy of Daylin Paul whose haunting Broken Land series documents the devastating impact of coal on communities:
Miscalculated risks
A dangerously weak business case
The Vhembe’s iron-cast industrial development plan has a fatal flaw:
There is no apparent demand for the 13 million tons of steel and alloys that will be uncompetitively Made-In-Makhado each year.
The MM-SEZ is being built in brazen defiance of chronic over-capacity in the domestic steel industry and the crippling costs of overcoming the severe water, power and logistical challenges posed by the location, without any proper market analysis to substantiate assertions that 70% of the zone’s output will be exported to China (the world’s biggest coal exporter) or alternatively, that all of it is destined for unspecified buyers in SADC.
Although the infrastructure costs will be absorbed by the South African fiscus and have thus been stripped “off-balance sheet” for the MMSEZ SOC, from the perspective of the real investor - South Africa - the market risks alone make this greenfield crude steel manufacturing mega-project a total loser.
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The market opportunity for a crude steel manufacturer located in northern Limpopo is singularly lacking.
Both China and South Africa’s domestic steel industries already operate far below their shrinking production capacities - currently 40% below capacity in SA.
Dumping by none other than China into the stagnant local market (which has shriveled to about 4 million tons a year) is partly blamed for the local industry’s woes, which, ironically, now also survives on taxpayer handouts and protectionism under the Steel Industry Masterplan, the DTIC’s rescue plan for the ailing industry, that penalises downstream steel consumers.
There is little to justify the government’s investment in the expansion of crude steel manufacturing capacity in the context of a local steel industry plagued with over-capacity, beyond the fact that it would improve the profitability of mining the Vhembe’s coal deposits.
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The cost of building the dedicated supporting infrastructure needed to overcome the severe water, power and logistical challenges of building a super-sized smelter in the remote and arid Vhembe District some 670Km from the nearest sea port at Maputo, is estimated in the 2019 Internal Masterplan at R96bn.
Although it is dubious whether the water and power supply challenges can feasibly be overcome at any price, this cost estimate makes a mockery of the claims that the location on the N1 North-South Corridor is advantageous.
Is the MMSEZ viable?
A Chinese zombie factory being built on South African soil?
Serious governance lapses
Hazards of the Special Economic Zones
At their worst, SEZs can operate as sovereign Bermuda Triangles; dirty paradise islands for foreign business, where the hard-won protections under law from the worst predations of capitalism are eroded to breed unfairly-advantaged foreign competitors that then threaten to cannibalise local firms.
Having presided over chronic economic stagnation and a jobs blood-bath, however, vote-hungry local politicians have fallen for the mirage of China’s Shenzhen (where the SEZ concept was pioneered) and the fistfuls of cash on offer to chase it, and so are willfully blind to the gross exploitation of workers and the environment that has accompanied industrialisation Shenzhen-style in China, along with the risk of failure discussed above.
In the case of the MM-SEZ, these hazards have been compounded by gross governance lapses. After establishing the state-owned company and installing yet another ANC cadre, Lehlohonolo Masoga, at the helm, the dtic has in a breathtaking act of dereliction, ceded near-unfettered control of the zone to a grossly unfit foreign firm; Shenzhen Hoi Mor Resources Holding Co (no website - see SA subsidiary; SAEMB).
Limpopo For Sale! Goin’ cheap-cheap
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Appointed as the zone’s operator for a period of 99 years (with an option to renew for another 20 twenty), Shenzhen Hoimor is little more than a Hong Kong-registered shell company that fronts for its controversial CEO, Yat Hoi Ning.
Fired from his last job as CEO of London-listed ASA Resources Group (formerly Mwana Africa) amid allegations of embezzlement upheld in a UK High Court judgement, Ning was evading an arrest warrant on further charges of fraud when the MM-SEZ deal was signed with then minister of Trade and Investment, Rob Davies.
Under the terms of the operator agreement, Shenzhen Hoimor which controls all activities inside the zone, even bears responsibility for environmental protection, contrary to its own interests.
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Amplifying the risks even further is the opacity surrounding the funding plans.
Beyond the participation of Bank of China, China Development Bank and China-Africa Development Fund at various roadshows and signing ceremonies, nothing has been publicly disclosed.
The Garage Sale of Limpopo’s Resources wraps-up: September 19, 2017, SEZ Operator Permit handover ceremony
Whose gain at whose expense?
The voluminous assessments of the net economic gains undertaken by the project’s backers are crude, distorted and deeply flawed:
Essentially, under the terms of this deal, China gets to mop up its excess capacity in construction, “off-shore” pollution and acquire the infrastructure to import raw coal from a new South African source all at the expense of South African taxpayers, other local SA industries and rural communities, land and water resources and the planet. There will in fact be losers in this particular win-win partnership of the Global South - and they are concentrated in the actual South.
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The economic cost-benefit case for the industrial development is not just weak but heavily skewed.
Most of the downside risks and costs have been stripped out and dumped on South African tax-payers and other sectors of the economy and society, whilst much of the upside will accrue to coal-miners or bleed offshore.
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The mantra of “minerals beneficiation for export” (as opposed to the “disgrace” of selling raw commodities) is chanted ad nauseum in the generally cringeworthy government-sponsored promos of the MM-SEZ. In reality, it’s not at all clear how South Africa actually benefits from the minerals beneficiation on our soil when the so-called “exporters”, earning the export sales revenue, are not South African but foreign.
Under this FDI paradigm, South Africa suffers the severe water resource depletion and environmental damage, along with the punishing knock-on effects for other industries, in order to perversely succor a form of home-brewed foreign competitor to cannibalise the shrinking regional steel market.
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What profits are to be made - from the infrastructure construction contracts in the construction phase and by steel producers in the operational phase (assuming the lavish subsidies produce a profit margin for the foreign factory-owners) - will accrue not to South African pension funds invested in JSE-listed firms, but to the Chinese-owned contractors and investors.
Meanwhile, the beleaguered South African tax payer will be saddled with paying the debt for the eye-watering cost of the infrastructure needed to overcome the water, power and logistical shortcomings of the location, in exchange for a wretchedly meagre contribution to the public coffers of R773m cumulatively over twenty years as per the Mintek Economic Rationale report, thanks to slashed tax rates in the zone (assuming the rent-paying factory tenants do materialise and the whole enterprise doesn’t wind up a dirty white elephant).
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Whilst it is indisputable that jobs will be created locally, perhaps even the 21,000 promised over the next 5 years, transport infrastructure will be upgraded and the region will benefit from an economic stimulus effect, there has been no proper assessment of any alternative better-fit model of development to achieve these economic gains for the region at a lower risk and cost - as required under South African environmental law. It seems highly implausible that capital or water for that matter - an equally scarce resource in Limpopo - is flowing to the most productive use here i.e. where returns are highest.
Just as a measure, based on the Masterplan’s infrastructure cost calculations of R96.2bn, to be funded by the SA fiscus, each of the maximum potential 52,000 direct and indirect jobs that may be created over the next twenty years will cost R1,8bn each - before any interest has been paid on the debt or any of the externalised costs borne by nature and wider society are factored into the equation.
The real impact of coal on communities
