ESG Report 2021
Exxaro Resources Limited
Integrated report 2021
Exxaro's macro-economic operating context and commodity markets include global and local influences that affect our ability to create value for all our stakeholders over time.
During the second quarter of 2021, global economic activity reached an important milestone, surpassing the pre-pandemic real GDP peak attained in the fourth quarter of 2019. The global economic expansion lost momentum in the third quarter of 2021 as new waves of COVID-19 infections dampened consumer sentiment and halted production. However, after a 3.4% contraction in 2020, global real GDP is projected to increase by 5.8% in 2021; its strongest advance since 1973.
Going into 2022, the post-pandemic economic surge is expected to subside as pent-up demand is exhausted and allows for a downshift in global real GDP expansion. The withdrawal of fiscal and monetary policy stimuli will weigh on growth as governments contain spending and contend with higher debt burdens. COVID-19 vaccination rates are expected to increase further and, barring any renewed infection rate increases, enable affected economies to reopen.
Global GDP: 5.8% (2020: -3.4%)
| 2022 forecast |
2021 | 2020 | |
| World | 3.3 | 5.8 | (3.4) |
|---|---|---|---|
| US | 3.3 | 5.7 | (3.4) |
| Eurozone | 2.4 | 5.4 | (6.4) |
| China | 5.1 | 8.1 | 2.3 |
| India | 6.4 | 8.8 | (7.5) |
| South Africa | 1.7 | 4.9 | (6.4) |
Source: IHS Markit, January 2022.
The pandemic has strained South Africa's fiscal position with public sector debt sustainability remaining under threat. Furthermore, South Africa experienced its worst-ever year of rotational power cuts with Eskom continuing to highlight the impact of high debt burdens, illegal connections and weak cash flow. This hampered Eskom's electricity rehabilitation programme. South Africa's electricity constraints are expected to continue impacting its growth prospects into 2022.
Cause
Implications for Exxaro
Our strategic response
During financial and economic turmoil, two key dynamics of the US dollar normally come to the fore: the continued role of the greenback as the dominant global reserve currency and the corresponding role played by the Federal Reserve as the "world's central bank", and the view that dollar assets, especially US Treasury bills and bonds, are regarded as safe havens. This was no different in 2020 and the majority of 2021. However, global risk sentiment has become more volatile during 2021, sensitive to the threat posed by mutating COVID-19 strains, higher inflation and the shifts in international monetary policies.
In South Africa, the rand strengthened remarkably on the back of strong appetite for risky assets, weaker US dollar, robust commodity prices, better-than-expected domestic fiscal outcomes and encouraging signs that the governing political party started to act decisively against corruption allegations within its ranks. Frequent spells of risk aversion throughout the year tended to favour the US dollar. The US$/R exchange rate is expected to remain volatile in 2022, mainly driven by whether the surge in inflation largely reflects transitory factors.
Cause
Implications for Exxaro
Our strategic response
Product price increases continue accelerating as economies recover from the 2020 pandemic-induced recession. Beyond the base effects, several factors accounted for this surge, including increased commodity prices, sharply higher shipping costs, and supply/demand mismatches in multiple segments of the global value chains. Fundamental differences between the producer price index (PPI) and consumer price index (CPI) resulted in weaker pass-through of producer to consumer prices for the period under review.
South Africa's 2021 PPI was 7.1% while CPI was 4.5% with CPI well within the Reserve Bank policy of between 3% and 6%. However, producer prices are expected to reduce while consumer prices edge up slightly, barring any major shocks to the rand, fuel and administered prices.
Cause
Implications for Exxaro
Our strategic response
Companies need to demonstrate their contribution to a sustainable future and assist with the long-term economic and social growth in their host communities.
Cause
Implications for Exxaro
Our strategic response
For more information, refer to creating value through stakeholder engagement.
Overall, business confidence in South Africa is improving. Amid the gradual relaxation of some COVID-19 restrictions during the second quarter of 2021, significant optimism was recorded and rose to well above pre-pandemic levels and the highest level since 2014. The civil unrest and looting in parts of the country was a temporary setback to what otherwise remained a cyclical economic recovery. Additionally, domestic coal producers and exporters were adversely impacted by logistical constraints linked to poor Transnet Freight Rail (TFR) operational performance.
Cause
Implications for Exxaro
Our strategic response
Underground operations at ECC
Companies are exploring new data-informed methods of mining, assisted by technology. This requires an understanding of the potential future workforce and the necessary skills sets.
Cause
Implications for Exxaro
Our strategic response
For more information, refer to Digital@Exxaro.
Globally, we are seeing an increase in transitional and physical climate change risks. Under the current trajectory, Exxaro expects the impact of these risks on our business to be medium to high over the next 10 to 20 years.
In response to climate change, global efforts are driving economic reforms, commitments and regulations to steer decarbonisation efforts. These include:
In response to climate change, global efforts are driving economic reforms, commitments and regulations to steer decarbonisation efforts. These include:
Cause
Implications for Exxaro
Our strategic response
For more information, refer to our environment.
Stakeholders in global mining companies are expected to contribute to communities and economies, play a role in ethical supply chains and participate in combatting climate change.
Cause
Implications for Exxaro
Our strategic response
For more information refer to social licence to operate.
During 2021, global markets were affected by fluctuations in COVID-19 infections rates, coupled with increased vaccination rates, high commodity prices, supply chain disruptions, economic recovery with inflationary pressures and a shift in energy transition policy.
The combined effects of COVID-19 on supply chains, the global energy crunch and inflationary pressures have impacted prices and demand in global markets while demand for sized product in the domestic market remained stable. Notable events included:
Cause
Our strategic response
Exxaro's commodity markets recorded strong performances in 2021 as market fundamentals remained tight before softening towards the end of the year. Key drivers during the year were COVID-19 infection rate fluctuations, supply disruptions, the global energy crunch, implementation of China's domestic policy and continued energy transition themes.
API4 coal export price averaged US$124/t
(2020: US$65/t)
| Commodity | 2022 forecast |
2021 | 2020 |
| Thermal coal (RB1) | 105.00 | 124.12 | 65.20 |
|---|---|---|---|
| Thermal coal (RB3) | 81.57 | 93.08 | 48.88 |
| Hard coking coal | 178 | 227.29 | 123.43 |
| Iron ore fines | 86.25 | 159.89 | 109.03 |
| Lump premium | 15.00 | 22.58 | 9.68 |
Source: Various commodity market intelligence reports, Nov 2021 & Jan 2022.
Cause
Implications for Exxaro
Our strategic response
As the world economy recovered from the pandemic-induced slowdown and COVID-19 vaccinations gained significant momentum, global energy demand increased but disrupted thermal coal supply chains struggled to catch up. COVID-19 restrictions, wet weather, mine accidents, licence disputes, rail underperformance, protests and strikes contributed to supply disruptions.
China's ban on Australian coal imports continued to disrupt the global thermal coal market and further fuelled China's domestic thermal coal shortfall in the process.
In Europe, the price of coal, gas and liquefied natural gas (LNG), as well as Europe-specific carbon prices, increased strongly for the better part of the year. Markets were also affected by continued cold weather during April and May, lower LNG import levels, declining gas production and higher demand for thermal generation as wind power dropped to low levels. Although gas storage was required to rebalance the market, the gas supply deficit impacted Europe's coal power markets, enabling a switch from gas to coal power.
Globally, natural gas markets experienced strong demand and supply shortages. Any relief from high gas prices relies on the availability of increased gas pipeline supplies into Europe.
The factors mentioned above resulted in record thermal coal prices at one point during the year.
The demand and pricing in the domestic market for sized coal remained relatively stable in 2021. The domestic unsized coal market continued to be oversupplied due to export rail performance challenges.
Turning to hard coking coal, strong purchasing by Indian steel mills was a major contributing factor to the record premium hard coking coal spot prices in 2021. With improving supply from Mongolia and expected supply improvements from Australia, the market is anticipated to moderate into 2022, barring any La Niña-related supply disruptions.
Cause
Implications for Exxaro
Our strategic response
TFR railed 58.12Mt to RBCT from January to December 2021, compared to 70.1Mt for the same period in 2020. Rail remained constrained throughout the year due to security-related incidents and locomotive availability.
Given these challenges, TFR has informed industry that coal line capacity has reduced from 81Mt to 70Mt for the 2022/2023 period.
Export rail performance from Grootegeluk dropped drastically from 6.32 trains per week in 2020 to 4.61 per week in 2021. Exxaro is evaluating all strategic options in a drive to improve the Waterberg export logistics performance in the medium and longer term.
Cause
Implications for Exxaro
Our strategic response
During 2021, iron ore prices traded at record levels on the back of strong Chinese steel production, supported by the rest of the world's robust demand conditions, before concerns about China's economy slowing, pollution-related steel output cuts and relatively low steel mill profitability triggered a change in sentiment, followed by significant price declines towards the end of 2021.
The Chinese property sector slowdown was cyclical and structural as housing demand peaked and property is no longer used as a countercyclical policy instrument. The rapid deterioration in the financial condition of Evergrande, a large property developer in China, raised significant market risks around the activity outlook and therefore steel consumption.
For 2022, lower steel production is anticipated in China due to power shortages, a property sector slump, emission controls in the lead up to the winter Olympics, and a broad-based economic slowdown. Global iron ore supply growth remains a further downside risk to the expected softer market.
Cause
Implications for Exxaro
Our strategic response
Report Index