THE raw data emerging from Transnet exposes how frayed the lifeline to global markets has become for the country’s bulk minerals exporters. At the time of writing, Transnet was yet to publish its annual numbers, but reports from coal miners suggest its business unit, Transnet Freight Rail (TFR) will have to shoot the lights out between July and December if it’s to sustain last year’s 66.9 million tons/year (Mt/y) in coal volumes.
Even at that lofty target, the coal line is underperforming. Export coal volumes totalled 72Mt in 2020, which is a massive undershoot of the line’s 80Mt/y capacity although that number has rarely been reached. What’s especially galling for the coal miners is that billions of rand in revenue – and tax take, for that matter – is being left on the table given the extraordinary gains in prices.
It has forced miners such as South32, which produces manganese, and the coal miners to truck their minerals – the latter reported to have sent an annualised 6Mt by road in May. Trucking is more expensive for mining firms than rail, but it’s economic at the current prices of some minerals and is definitely better than a capital build-up that would result from stockpiling.
The Minerals Council South Africa has calculated that the industry’s opportunity cost in 2021 was R35bn, based on measuring delivered tonnages against target. The number grows to R50bn in the same year based on delivered tonnages against installed rail capacity.
“The bulk mining industry is deeply concerned about the difficulties of railing their products to harbours and meeting contracted sales,” says the council’s head of communications, Allan Seccombe. “Key for the industry is for Transnet to return to targeted deliveries, and then sustainably realise installed capacity, before we can start talking about expansion.”
We are spending a lot of money to try and reduce the impact of these incidents but the type of theft and vandalism we are experiencing indicates we are responding to syndicates.
In a June 3 report, RMB Morgan Stanley estimated that at spot prices, the South African government would earn R140bn in income, taxes and royalties from mining in 2023. This is 8% of the National Treasury’s budgeted revenue. Three coal miners – Exxaro Resources, Glencore and Thungela Resources – will pay about R58bn of this in taxes and royalties in South Africa on their coal earnings at spot prices. Using a purely linear relationship, another R15bn could be generated from these companies if Transnet could return rail volumes to 80Mt/year, the bank said.
Binding constraints
In an interview, TFR CEO Sizakele Mzimela, who was appointed in April 2020, said the division faced three binding constraints that were hampering operational performance and which management was taking steps to address. The first is crime and vandalism of rail infrastructure. While not a new problem, it has now reached unprecedented proportions.
“We are spending a lot of money to try and reduce the impact of these incidents but the type of theft and vandalism we are experiencing indicates we are responding to syndicates,” she said. TFR needs assistance from outside parties to address the issue sustainably. Mzimela said it was essential to ensure that when criminals tampering with the network are caught, their convictions move ahead faster and sentences are harsher. At this stage, the conviction rate is only 10%, so it is not a deterrent.
She says this issue is receiving attention from government and there are encouraging signs of progress, although the results are not in the public eye.
The second major constraint is a shortage of operational locomotives – a consequence of the endemic corruption perpetrated during the administration of former president Jacob Zuma. TFR suspended a contract in 2012 in which 1,064 locos for freight trains from China North Rail, China South Rail, General Electric and Bombardier were irregularly procured. The effect is not only that the full 1,064 locos have not been received, but also that the original equipment manufacturer is no longer supplying spare parts for those items already delivered – or for the 100 locos it supplied in previous years.
According to Mzimela, that means many locomotives are having to be parked because they lack spare parts, which has a significant negative effect, particularly on the coal line. In late June, Transnet CEO Portia Derby said in an interview that Transnet would shortly issue a tender to procure new locomotives to help improve logistics for the mining sector.
The third binding constraint is Transnet’s ageing infrastructure, reflecting underinvestment over the past decade. Work to address this is under way, facilitated by recent changes to the procurement regulations that enable Transnet to obtain key materials. But while these issues are being addressed, TFR cannot fulfil its ‘take or pay’ obligation in its long-term contracts with coal miners, and is negotiating amendments to those contracts.
Contracts
In April, Thungela and Exxaro reported that Transnet had invoked force majeure on its contract with them because of difficulties obtaining spares for the locomotives and vandalism (mainly cable theft) on the coal rail line. Exxaro said it did not believe these were force majeure events.
In terms of its contracts with bulk minerals exporters, TFR allocates capacity on its rail corridors to each customer which they must pay for even if they do not fully utilise it. TFR commits to railing a volume that it believes is within the capacity of the system.
Mzimela says the long-term contracts, especially in coal, also specify that if TFR is unable to fulfil its contractual obligations for particular reasons that persist for longer than six months, it triggers either termination of the contract or the requirement to enter into discussions about an addendum that acknowledges the difficulties that either party faces.
In its long-term contracts with coal producers, TFR is facing the situation that its minimum capacity on the rail line to the Richards Bay Coal Terminal has fallen to 60Mt/year as a result of the crime and shortage of locomotives, which is why it has invoked force majeure, says Mzimela.
We potentially need to get someone inside Transnet to actually give us the truth and actually give us some attribution as to what these volume losses [are] and how they are coming.
Another important fundamental factor necessitating renegotiation of the contracts is the permanent change in the sites from which coal is exported, according to TFR’s managing executive for the Northern Corridor, Ali Motala. It is now taking longer for TFR to collect coal from its customers, which reduces its throughput capacity. More crucially, some of the new sourcing areas are on an infrastructure network that has a maximum capability of 20t per axle, compared with 26t per axle on the dedicated network, which means TFR can only load 75% of the wagon capacity. “It is not a single item that needs to be remedied, but a suite of circumstances existing at the same time that has resulted in TFR’s reduced system capability,” says Motala.
TFR is working with its coal export partners to address various issues, including security and consolidating loading areas to improve cycle time. “These discussions are about a correct rebasing of where we are at this point, which will help all of us to understand this situation and help to improve the system to previous levels,” says Mzimela.
“We do take responsibility for many of these issues and are taking various steps to address the shortage of locomotives, improve security and rehabilitate the infrastructure. But that is not enough unless our customers come to the party and are more open in identifying consolidation points to enable us to turn our trains around as quickly as possible.”
She says TFR is not renegotiating take or pay clauses, but rebasing to a new starting point from which to grow back towards previous targets. “Rebasing is about where you start the race – not about giving less. We all want to attain far greater capacity. This requires us all to put in an effort to get to the finishing line.”
Greater private-sector participation
Seccombe says Minerals Council members are advocating private-sector participation in the railways carrying their products as well as in the harbours. Transnet has previously announced its intention of granting concessions to private-sector companies on certain container routes. Transnet leadership has previously ruled out concessions on the dedicated iron ore or coal lines, which are its most profitable.
However, the concessions on offer on the container lines are only for up to two years – far too short a period, some companies argue, to justify the level of upfront investment necessary to get those routes operational. Mzimela acknowledges the argument but adds that the two years was only a first phase of granting third-party access: “We need time to test and refine the model before we commit to longer periods. It is only through implementation that we think we will be able to refine the model to meet South Africa’s needs.”
Rail owners elsewhere in the world who have granted third-party access have only done so for short periods, in some cases a year or less, she says. Operators would not be obliged to invest substantial capital upfront, as the evolution of South Africa’s rail sector is likely to be similar to that of the airline industry, with the emergence of companies that will lease out locomotives to parties that are interested in operating the lines.
Mzimela says she’s hopeful a White Paper on National Rail Policy, published in March, will provide a level of comfort for those who want to participate in the rail sector in the long term. The White Paper is intended to facilitate private-sector investment in the network.
The other reason for avoiding long-term contracts is that TFR wants to ensure there is transformation in ownership. If it grants long-term contracts to the companies that are capable today of running those lines, it locks out emerging black businesses that will be able to run those lines in the future.
Despite the objections to the length of concessions, TFR’s request for expressions of interest have produced a surprisingly strong response. While TFR expected five or so companies to express an interest, some 19 companies sent in signed submissions. “There is noise, and there is serious interest,” says Motala.
Reversing the migration from rail to road
Mzimela says the White Paper’s thrust towards bringing in other operators on the rail line may help to reverse the migration of freight from rail to road. The White Paper proposes that investment in rail will come from an infrastructure fund, so that Transnet does not have to use its own funds for maintenance.
“I believe this will help to level the playing field. Where we have had more challenges in moving from road to rail is between Gauteng and Durban, for example. TFR cannot compete with ageing infrastructure and vandalism against roads that are well maintained by government. We need to provide the same level of reliability.”
Motala says TFR carries just under 14% of the value of South Africa’s gross domestic product. This compares favourably with one of the global market leaders, DB Netz of Germany, which carries 19%. TFR would never attain a 50% market share in freight traffic, particularly as the trend in freight is towards smaller consignments and manufactured goods rather than bulk commodities. “We are confident that, despite all the challenges, we are continuing to migrate from road to rail, where it makes sense,” Motala says.
From an industry perspective, the launch of a White Paper at this juncture – essentially a discussion document about a well-defined problem – is unnecessary prevarication by government. “It seems absolutely crazy that we are waiting on a White Paper on possibly starting a conversation about – maybe – allowing more locomotives on the rail,” says Patrick Mann, an analyst for Bank of America Merrill Lynch.
Speaking during question time at an Exxaro presentation in June, Mann asked why there was not more urgency in addressing the issue. Nombasa Tsengwa, CEO of Exxaro, said TFR was beginning to respond to her firm’s outspokenness almost two years ago about railing difficulties but that it didn’t help now to criticise government.
The other reason for avoiding long-term contracts is that TFR wants to ensure there is transformation in ownership. If it grants long-term contracts to the companies that are capable today of running those lines, it locks out emerging black businesses that will be able to run those lines in the future.
“The process is inevitable,” said Tsengwa of government’s White Paper. “The question is what we can do as an industry to make sure we are relieving the pressure, recognising the fact we know the skills base at TFR is not always optimal.”
That’s not enough for some. “We can sit at these forums and talk and be somewhat comforted, but unfortunately the numbers are the numbers and they are still declining,” says David Fraser, chairman of asset manager Peregrine Capital. “They are getting worse despite this talk.”
“Quite frankly, I do think the industry needs to step up. We potentially need to get someone inside Transnet to actually give us the truth and actually give us some attribution as to what these volume losses [are] and how they are coming.”
Positive progress
Mzimela says TFR is working to secure more locomotives through the tender recently announced by Derby, and is continuing to work with government to intervene to unlock the blockage on spare parts for its fleet. “In the short term, we have taken steps to understand what kind of locomotives and technology are most appropriate for our heavy-haul lines and we have installed the necessary technology to improve export coal movements.”
This article first appeared in The Mining Yearbook 2022 which can be accessed free of charge here >>
