Commodity exporters brave bloodbath to protect market

Transnet finalising business case for a new track through Swaziland.
Siyabonga Gama Interim Transnet CEO

South African miners are largely maintaining export volumes of commodities including coal and iron ore despite a pricing bloodbath in those markets, according to the head of the state-owned freight-rail and ports operator.

Transnet SOC Ltd. expects to move about 75 million metric tons of export coal and 60 million tons of iron ore on its railways in its financial year through March 31, Acting Chief Executive Officer Siyabonga Gama said. That’s largely unchanged from 76.3 million tons and 59.7 million tons in fiscal 2015. Miners have indicated they’re concerned about losing market share if output slows, Gama said.

“There is a bloodbath in the commodities market, but the extent to which we have experienced it, it is much less than what we thought might actually happen,” Gama said in an interview last week at Bloomberg’s Johannesburg office. “When I talk to the customers, some of them feel very strongly that if they responded to the market they would be squeezed out completely.”

The company had budgeted for export coal volumes of 77 million tons and 62 million tons of iron ore in the current financial year, Gama told reporters in July.

Transnet is implementing a rolling seven-year, 336 billion- rand ($25 billion) plan to expand and upgrade rail and port capacity in South Africa, the world’s biggest manganese producer and the continent’s largest of iron ore and coal. The project aims to reduce bottlenecks and shift freight from roads to rail in the country where Anglo American Plc, Glencore Plc and South32 Ltd. have operations. While the rail operator remains committed to completing its investment plans, some projects may take longer than previously expected because of the decline in commodity markets, Gama said.

“The investments that need to be made are going to be made,” he said. “It’s now an issue more of timing.”

Price decline

Iron-ore prices have fallen 19 percent this year and are 70 percent below a 2011 high of $191.70 a ton because of rising low-cost output and weaker growth in China, the biggest buyer. The price of coal at Richards Bay on South Africa’s Indian Ocean coast has declined 15 percent as the Asian nation, which is the largest user of the fuel, turns to cleaner alternatives.

It’s unclear how long mining companies can continue producing at current rates, Gama said.

While some projects may take longer, Transnet’s moving ahead with developing a manganese terminal, which will begin operations in 2019 and have annual capacity of 16 million tons, Gama said. The company said last year the project would cost 27 billion rand.

The company will probably start work early next year on a new rail tunnel on the Richards Bay coal line, about 30 kilometers (19 miles) southeast of the town of Ermelo in the coal-rich Mpumalanga province. The current Overvaal tunnel is 40 years old and has some “niggling” problems, Gama said.

Swaziland track

Transnet is also finalizing the business case for a new track through Swaziland, which would accommodate general freight and free up capacity on the coal rail line.

“I think we’ll be able to start in Swaziland next year,” Gama said. “We are busy now with just looking at how we are going to structure the financing but there are lots of people who are interested.”

Transnet also rails lower-grade magnetite, a type of iron ore. Exports of the material halted completely as the price tumbled to $30 a ton from about $100, Gama said. With a subdued recovery, some of the exporters have only recently resumed their shipment program, he said. Current magnetite volumes are “not small,” he said. “It’s about 8 million tons.”

Transnet plans to raise 10.5 billion rand in debt including bonds before the end of the 2016 fiscal year, having obtained 17.3 billion rand since April 1, Gama said in the interview. The company will target the local bond market, export-credit agencies and development-finance institutions as it seeks money to invest in infrastructure, he said.

©2015 Bloomberg News


You must be signed in and an Insider Gold subscriber to comment.





Instrument Details  

You do not have any portfolios, please create one here.
You do not have an alert portfolio, please create one here.

Follow us: