Kumba Iron Ore is aligned with Transnet on plans to co-fund “fixing the broken pieces” of the 860km railway line from Sishen to Saldanha but will also look to take advantage of the potential to concession out the line to private players, Kumba CEO Mpumi Zikalala says.
She was speaking to Business Day after SA’s largest iron producer reported a 45% decline in earnings for the year to end-December.
Though Kumba has had to cut volumes to respond to logistics constraints, Kumba CFO Bothwell Mazarura said declining ore prices were by far the biggest contributor, with slightly lower volumes affecting earnings before tax, interest and depreciation by a negative R2bn against a pricing impact of R17.6bn, and ebitda was down 38% to R28bn.
The company reconfigured its business last year to address the logistics constraints, achieving cost savings of R4.4bn against a target of R2.5bn-R3bn and Zikalala said Kumba was targeting a further R2.5bn-R3bn of cost savings this year.
Though Transnet and the government have opened the way for private train operators to apply to use Transnet’s lines, the ailing state of the network infrastructure is a constraint, with estimates it will need R14bn a year over the next five years to get it up to standard — more than cash-strapped Transnet can fund.
Transnet is working with its large customers on the two dedicated heavy haul lines — iron ore and coal — to repair the infrastructure and CEO Michelle Phillips told the recent Mining Indaba she hoped to finalise agreements with them soon.
Zikalala confirmed on Tuesday that Kumba was working with Transnet and other members of the Iron Ore Users’ Forum to finalise the ore corridor restoration programme “which is all about fixing the broken pieces”. It was engaging on some element of funding linked to a co-operation agreement, as were big users on Transnet’s coal line.
The forum had jointly agreed with Transnet on what should be done, based on an independent technical assessment. It was looking to partner on the funding but would claw that back through the tariffs paid to Transnet. It was also assisting where it had better relations with original equipment manufacturers, which in some instances enabled better prices for equipment.
“We are fully aligned with Transnet,” said Zikalala, who credited Phillips with ensuring Transnet and its large customers had much better relations than in the past. “We are collaborating on what needs to be done.”
For the medium to longer term, the forum is looking to the private sector participation space, with the department of transport expected to go out with a request for information for some of the corridors. “This is where we see potential concessions coming in,” she said.
Efforts to improve the performance of the iron ore line last year have already resulted in some improvement. It managed to fix 90km in its annual shutdown last year, enabling it to eliminate speed restrictions on 50km of the line.
But while there was a 5% improvement in performance in the last quarter of the year after the shutdown, volumes for the full year did not improve. “The recovery is not going to be a quick fix,” she said, pointing to the effects of five years of underinvestment.
Iron ore prices have been hit hard by the woes of China’s property sector over the past few years, which have not only reduced demand but also prompted Chinese ore producers to up their exports, putting pressure on global prices.
There has also been a small increase, of about 1.1%, in the supply of iron ore to the market. The iron ore price has been trading in a range of about $100 per tonne and is now about $106.
Mazarura expects prices to continue sideways though a key unknown on the macro side is potential trade wars.
Anglo American controls Kumba, the last sizeable SA asset that Anglo plans to keep in its radical restructuring, which will cause the London-listed group to unbundle its platinum business and shed De Beers.
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