Optimum Coal, one of Eskom’s main suppliers, is taking legal action to cancel its contract to supply 5.5 million tonnes annually to Eskom’s Hendrina power station. Such a course is believed to be unprecedented in the history of Eskom’s relationship with the South African mining industry, which supplies the bulk of the 120 million tonnes of coal the utility’s power stations burn annually.

Things have gone from bad to worse since the power crisis of early 2008. Eskom has complained about the poor quality of coal delivered; the rising cost of South African coal and concerns over future security of supply. Optimum put out a Stock Exchange News Service statement on September 14, stating it had given notice to Eskom in May this year of its intention to cancel the coal supply agreement with Hendrina. The matter has already gone to arbitration, the preliminary hearings having been held on August 10, but for reasons mainly connected to the settling of the facts of the case it hax been postponed to March 2011.

Optimum bought the colliery in 2008 from BHP Billiton Energy Coal and took over the coal supply agreement. It was widely suspected at the time that Billiton had been losing money on the contract to supply Hendrina.

At the centre of the current legal action is Eskom’s action in holding back ZAR 22 million in payments due to Optimum as a penalty because the coal supplied did not meet quality requirements. Eskom maintained the coal supplied was too abrasive, which increases wear and tear on its plant and equipment.

Optimum has gone to arbitration to recover the ZAR 22 million from Eskom, but the utility has disputed that it owes the money and also that Optimum is entitled to cancel the coal supply agreement.