TFR, Eskom bewilder and delight

[] — BORROWING from Eskom CFO, Paul O’Flaherty, who was commenting on his own company, the goal of every state-owned company (SOC) is to be boring. According to his logic, boring means predictable.

Predictably good, one hastens to add.

Unfortunately, South Africa’s key SOCs – principally Eskom and Transnet – were far from boring in 2011. Broadly speaking, both were entities emerging from years of neglect when both were, for a period, without permanent CEOs.

On the positive side, Eskom and Transnet, especially its freight arm, Transnet Freight Rail (TFR), showed themselves to be turnaround stories in the making.

For Eskom, this was a year in which the power utility finally addressed the pressure bearing down on its balance sheet.

All but one of the embedded derivatives – power sold forward at a predetermined rate – had been removed by the close of the company’s 2011 financial year. With the volatility in revenue out of the way, and the first of three annual tariff hikes flooding through to the income statement, Eskom posted a R8.4bn profit against a R9.6bn loss only two years earlier, in 2009.

Yet heavy challenges persist for Eskom. While most of its R450bn capital expenditure requirements had been sourced, some 20% of its future coal burning requirements were outstanding. Eskom is therefore highly dependent on new mine builds.

It’s capital project Medupi also hit a major wobble in October when contractor, Hitachi, warned it would not meet boiler construction deadlines, a development that would further delay the 4,800MW facility. Given that Medupi is the first of two coal-fired power stations being built by Eskom, its delay puts South Africa’s future power supply on a knife-edge.

The start-up of Medupi had already been delayed by six months to the end of 2012, while the start-up of the second station – Kusile – had been pushed back by a year to end 2014/beginning 2015.


TFR’s train delivery in 2011 to Richards Bay Coal Terminal (RBCT), the 91 million tonnes/year (Mtpa) coal export handling facility, almost doubled. In fact, some 737 trains made the journey from Mpumalanga province to Richards Bay in November, up from only 435 in June.

As a result, annualised coal deliveries stood at 58 million tonnes (Mt) in June, but 65Mt in November disproving the critics who believed South African coal exports would fall below 60Mt for the year, some 33% below the country’s capacity.

Much of this improvement can be put down to Brain Molefe, Transnet CEO, although not without controversy. His reappointment of the previously suspended railways executive, Siyabonga Gama, provoked criticisms of a whitewash. “He’d made mistakes,” said Molefe of Gama’s dismissal in 2010 under a cloud of suspected tender misappropriations.

Nonetheless, the re-appointment of Gama helped Molefe push through efficiency improvements at TFR more quickly than many expected. He also sought to address the shortfall in rail capacity against RBCT capacity.

By building a rail through Swaziland, the so-called Lothair rail, general freight could be moved from the coal line, enough to help TFR put 81Mt on its coal line. In addition, Molefe and Gama spoke positively about a line from the Waterberg, described as the future of South Africa’s coal supply amid a decline in the future production profile of the Witbank coal basin.

Within Transnet itself, Molefe has increased accountability by setting regular report back meetings among senior managers. On the ground, train drivers were rewarded on number of deliveries compared to time in the field.

There were improvements, too, in deliveries to Mozambique, although TFR’s freight rates to Maputo were heavily criticised as being double that of Richards Bay. They might even threaten the viability of a 14Mtpa expansion at the Matola Coal Terminal, just outside Beira.

Proving that rail infrastructure is not just a South African phenomena, the country’s southern African neighbours also struggled with rail and terminal infrastructure incapacities. Botswana’s coal mining industry cooled during the year partly owing to the growing realisation that the much-mooted Trans-Kalahari line linking the country’s coal fields to Namibia’s Walvis Bay or Luderitz ports hasn’t attracted a wealth of finance.

As Gabaake Gabaake, permanent secretary for Botswana’s Ministry of Minerals, Energy and Water Resources noted in September, the country doesn’t have much access to RBCT, while trekking through Mozambique to Beira or Maputo ports poses similar problems, especially as demand for rail and terminal entitlement in that country has been upped several notches in the past year.

One Zimbabwe coal developer, LontohCoal, has mooted the notion of conveying its planned coking coal production in the north-western reaches of Zimbabwe to Beira in Mozambique, an astonishing 1,500km slurry pipeline infrastructure build programme. More hope than expectation?

Infrastructure problems also lie in wait for Mozambique, a country that has taken off as the African continent’s most exciting coking and thermal coal producer.

Mozambique’s planned 6Mtpa upgrade of its Sena rail, which links coal in the Moatize district with Beira, has repeatedly missed deadlines. The outcome is that Mozambique rail company, CFM, ditched a joint venture with an Indian consortium and set about the improvements itself. Coal producers are hopeful that by end-2012, the upgrade will be complete.

There were also questions regarding who will get entitlement to the planned Nakala rail and coal terminal, a development in northern Mozambique that is being largely financed by Vale, the Brazilian diversified miner.

The Mozambique government desires an open policy where all coal producers gain access to the line and port. Understandably, Vale is reluctant given its $4bn outlay on the line due for completion in 2014.