The slowdown in Transnet’s capital spending programme — particularly on the rail network for cyclical dry bulk commodities such as coal, iron ore and manganese — looks like history repeating itself.
In the late 2000s, when the resources sector boom caused by China’s rapid industrialisation had been running for about six years, SA’s coal and iron-ore companies could not take full advantage of high prices because of constrained rail and port capacity.
At this stage, mining companies are not yet worried because they are not convinced the upturn in prices is sustainable and there is little appetite for investing in large expansion projects.
In response to the most recent bottlenecks, Transnet launched a market-demand strategy in 2012, aiming to invest about R300bn over seven years in its infrastructure.
About R50bn was earmarked for coal to bring volumes on the Richards Bay Coal Terminal (RBCT) line to 98-million tonnes (Mt) a year, from 68Mt, and iron ore to 83Mt, from 53Mt.
In 2010, the privately owned RBCT increased its handling capacity to 91Mt.
But actual railings are well short of Transnet’s 2019 targets, which have been reduced. In its most recent financial year to March, it grew volumes on the coal line 2.4%, to 73.8Mt and manganese volumes 17.5%, to 12.1Mt. Iron ore carried on the export line fell 1.5%, to 57.2Mt due to lower demand and tippler issues at the port.
By end-March 2017, Transnet had invested R145bn and said it would invest R229.2bn more by 2024, down from 2016’s revised target of R254.9bn. It said its capacity across most of the freight system was ahead of demand. Its annual report shows Transnet is planning for export coal rail volumes of 76Mt a year by 2024 and export iron ore at 60Mt a year.
Transnet said that as SA’s manganese reserves made it a sustainable supplier to China and Europe, it would increase export capacity, first to 12Mt a year and then to 16Mt a year. This would be done by upgrading the rail network from Hotazel to Coega and building a new bulk terminal at the Port of Ngqura.
But it deferred moving the manganese export terminal from Port Elizabeth to Ngqura by two years. On the RBCT line, although spending of R5.5bn has been approved to build a new double-track tunnel next to the existing Overvaal tunnel, it has not begun work yet because it is looking "for an alternative technology solution to develop the tunnel".
Over the next seven years, it will spend 6% (R12.5bn) of its budget on manganese, 4% (R8.9bn) on iron ore and 7% (R14.3bn) on the coal lines.
Demand for different commodities may emerge in future due to environmental issues, China’s move to a consumption-driven economy or growth in other economies, such as India
In the past 18 months, benchmark prices of coal through Richards Bay, iron ore and manganese have doubled.
Chamber of Mines chief economist Henk Langenhoven says commodity prices move erratically but, if sustained, sales and production should pick up in response. Rail capacity only becomes an issue when actual tonnage increases. He says forecasts of the actual tonnage of SA’s exported commodities vary greatly. Transnet Freight Rail’s investment programme requires having a 10-to 15-year view. Demand for different commodities may emerge in future due to environmental issues, China’s move to a consumption-driven economy or growth in other economies, such as India.
Many large mining and logistical companies say there are no fundamental bottlenecks in coal rail capacity. Coal export volumes are largely flat and recent large investments have been in replacement, not expansion, of output.
South 32 vice-president and chief operations officer for Africa Mike Fraser says the group did not follow its rights in RBCT’s recent capacity expansion as it would have required a higher rate of investment in the South African coal business and South 32 was "not entirely convinced" it will be sustainable in the next few decades.
About 60%-70% of SA’s coal exports are to India, but India wants to increase consumption of its own coal. On the other hand, Eskom is running short of coal and the margins in supplying it could be more attractive than exporting.
South 32 also exports manganese. Fraser says this business is designed to respond to market demand.
Assore CEO Charles Walters says that although the upgrading of the manganese port terminal has been delayed by about two years, it will not affect the group’s ability to export as it can use various routes including Saldanha, Port Elizabeth and Durban.
Kumba Iron Ore spokeswoman Sinah Phochana says there were some operational rail and port issues, but Transnet promised to resolve them. Kumba increased production to meet higher demand in the past 12 months and was considering increasing its contractual capacity in the short and long term.
"We are sensitive to committing to long take or pay contracts for additional volumes given the volatility in prices and we will engage with Transnet on this," she says.
Clearly, not only Transnet but also the mining companies are struggling to see past short-term fluctuations in demand and pricing. If a mismatch between demand and capacity arises in the next few years, the blame should be shared equally.
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