Regional Report: South Africa - April 2013: bulk market copes well with myriad challenges in 2012

By Iain McIntosh 

OVERVIEW

Following good bulk export volume in 2011 from South African ports but growth in 2012 unfortunately slowed a little in spite of an initial positive outlook. That being said 4.8% growth of nearly 7mt (million tonnes) to 148.3 million tonnes was still good in light of a number of constraints. Volume performance slowed a little in the second half not helped by the mining sector industrial climate but much of the lower growth was a result of constrained capacity notably for the iron ore gateway and even more so the serious constraints on manganese ore. This was offset, however, by much improved coal export performance.

The forecast for the period 2013/2014 should deliver improved volumes with better growth rates as some of the significant Transnet port and landside infrastructure projects start delivering extra capacity. Therefore, even in the short term, demand levels look good and the main port exports and total bulk exports are tabled below.

With national elections looming in 2014 and a clear change in the union landscape within South Africa, the next 12–15 months and how business, labour and government manage the political environment will be critical. On the positive side, given government’s ditching of any further reference to nationalization and the Transnet market demand strategy (MDS) unfolding, the much- needed upgrade of rail and port infrastructure continues to present a healthy picture for above-average global trade growth in the bulk sector.This is covered in some detail below in a review of the major bulks. The key development areas are improving rail infrastructure whether through heavy haul lines for iron ore, coal and manganese ore to upgrades of terminals such as Saldahna Bay for iron ore as well as the vitally important upgrade of the manganese ore channel through the Eastern Cape. The MDS is the most important development for RSA over the next five years to ensure that growth levels in export bulk continues at 7–8% growth per annum.

REVIEW OF THE MAJOR SA BULKS

Coal trade

The global seaborne steam coal trade grew by 13% in 2012 to reach 816mt (million tonnes) (up from 722mt in 2011) and is set to increase by 5% in 2013 to reach 857mt. This growth is driven by both China and India who combined only imported 25mt in 2005 but will reach 295mt in 2013. Whilst South African coal exports have lagged behind this global growth 2012, there was at last some improving performance in exports as both Richards Bay Coal Terminal (RBCT) and the Maputo gateway saw increased volumes. This is set to grow further in 2013 with Transnet Freight Rail (TFR) stating that they should reach 77mtpa (million tonnes per annum) capacity on the RBCT line during the year whilst they expect to reach 81mtpa by 2014/2015. The export of steam coal through South Africa’s main three gateway ports is detailed below showing a forecast for 2013.

These are encouraging figures after previous slow growth, and 2012 did well considering Richard’s Bay coal prices hampered some export demand as they were higher than global pricing at certain points of the year.

At the recent IHS McCloskey coal conference in Cape Town in February 2013, there was a number of presentations from various stakeholders in respect the potential road map ahead for coal. Susan Shabangu (Minster of Mineral Resources) reassured delegates that nationalization is not government policy and the matter is closed, and minerals development cannot happen without investment from the private sector. She did, however, declare coal as a strategic resource given the challenges facing South African power supply noting that of the 260mt of coal mined in 2012 some 130mt was consumed by local power stations. ESKOM (Electricity Supply Commission) did a presentation highlighting the demand requirements for coal vs. demand for export growth. There were serious concerns that coal supply shortages could happen by 2018.

RBCT CEO Nosipho Siwisa-Damasane outlined plans for the terminal to move to a sixth phase of expansion, taking the current capacity of 91mtpa to 110mtpa. RBCT feels this is necessary to cater for demand, notably into India where growth forecasts for coal imports continue to rise at 10% per annum minimum. Whilst demand short term falls below this, as does TFR’s ability to rail greater volumes,TFR does feel that with coal production set to increase by 4% per annum — rising to 331mt by 2017 — then there is good volume to meet the inevitable global demand for the commodity.

An exciting recent announcement came from Transnet, which is looking at a ZAR 15 billion (US$ 1.6 billion) expansion at Richards Bay to complement the RBCT existing terminal capacity. Whilst a decision on construction has not yet been made, it would cater for emerging/junior miners and enable them to access export channels (of which there are many). The pre-feasibility study should provide a decision by June 2013. The terminal would look to an initial 14mtpa capacity; designed for smaller load parcels and different grades of coal, it also would be constructed with room to expand to 32mtpa. RBCT has actually welcomed plans for this development as positive for the industry at large. The study was driven by pressure from junior miners who, as yet, have limited or no access to RBCT.

Given existing coal exports of 75mt in 2013,Transnet expects to see export growth reaching 97.5mt by 2019 (conservatively), hence the need for extra capacity. The combined potential of RBCT and Transnet new terminal (without upgrades) would be 105mtpa so the demand figures do suggest a need for more capacity.

As for trading volumes from Richards Bay the graph on p63 shows the continuing trend towards Pacific basin and whilst India volumes eased in 2011 which affected share the longer-term trend continued in 2012 with Indian volume recovering to 22.6mt (33% of RBCT volume) and China to 12.4mt (18.1%). This volume will continue to increase with both these markets representing main demand areas.

A very positive outlook for coal exists in South Africa; however, it can be seen that there are some possible bottlenecks ahead as well as countervailing views between some of the stakeholders. The mood however is positive to tap into global growth in demand markets and RSA has the resource to develop this.

Iron ore trade

After posting exceptional growth in this sector, volumes from Saldahna declined by 3.4% in 2012 and this was primarily due to rail and port capacity being close to their maximum. As steel production globally started to flatten in the 2nd half of 2012, this also dampened demand. In spite of this, South Africa became the third-largest exporter of iron ore in 2012 after Australia and Brazil, as Indian exports declined

even further due to state bans on their exports widening. This, however, was a hollow gain as South Africa was unable to capitalize on the 40mt Indian decline, and all growth accrued to Australia which grew from 494mt to 438mt (over 12% growth) during 2012. The development of South African iron ore exports is detailed below with 2013 forecast to reach phase 1C total capacity of rail/port.

In July 2012, the Phase 1C upgrade was completed at Saldahna bulk terminal. Many of the gains have been made through operational efficiencies as, since 2009 (phase 1B), the port has been running with two tipplers, four stacker/reclaimers and two shiploaders. This is demonstrated by the fact that shiploading performance was 5,500tph (tonnes per hour) in 2009 and reached 7,800tph in 2012, and a terminal capacity of 60mtpa which is forecast for 2013. The Transnet MDS (Market Demand Strategy) will spend ZAR 28.6 billion (US$ 3.1 billion) on rail and port infrastructure

between 2013 and 2018 via phase 2A of the strategy. This would be via: v one additional tippler (total three units); v two additional stacker/reclaimers (total six units); and v one additional shiploader (total three units).

This would bring port capacity to 82mtpa

The rail upgrade is already under way and necessary to achieve the port capacity of 82mtpa, also as part of the US$ 3.1 spend. Numerous scoping reports at all levels were conducted several years ago to achieve the upgrade by various means through a combination of longer trains, increased passing places and double lines and this is the work that will take place over the next few years. The graph below shows likely extrapolated growth of iron ore volume through to completion of phase 2A expansion.

Manganese ore trade

Data released through Trademap.org shows that the exports of South African Manganese ore recovered strongly in 2012 after a slight decline in 2011. China exports led the growth; however, there was good growth into India which is increasing steel production, as well as Europe which — although flat on steel production — may be looking more to RSA for sourcing. The forecast for 2013 is a perhaps optimistic 8.56mt (38% of global trade) but South Africa does

control over 80% of global resources in this commodity. Also, there is increasing production coming from emerging miners such as Tshipi, Asia Minerals and Kalahari Resources.

The challenges come not from supply but the ongoing logistical challenges of getting the product to the exit port. South African manganese ore is mined in Hotazel in the Northern Cape nearly 1,000km from its main gateway port in Port Elizabeth Manganese Terminal. Volumes, however, have grown to a level where the Port Elizabeth terminal is at maximum capacity (5–5.5mt), and some product also moves bulk via Durban which handled 1.9mt in 2012. In recent years, there has been a growth in containerized exports, notably to China, also moving on the main rail link into Port Elizabeth with an estimated 1mt (12.6% of exports) moving in 2012, the equivalent of 38,000 × 20ft containers (much of this is packed in Bloemfontein to ease logistics on the Hotazel – Port Elizabeth line). Therefore, the challenges for short-term growth are questionable, given that containers can only provide a finite volume of capacity (ship system/container supply), whilst bulk options are limited and rail capacity on the line are also at close to their limit.

 

Transnet Freight Rail is in the process of upgrading the rail line to a heavier haul line with capacity to handle over 16mtpa. There are also plans to increase port capacity through the new deep water port of Nqgura in the Eastern Cape to handle larger vessels, as well as 16mt capacity. A trial was conducted in late 2012 using a 208 wagon train (double the normal haul), which was largely successful. However, upgrades on a structural basis will take longer as rolling stock, locomotive power and passing places need to be installed. The timescales for this upgrade are set at 2016–2017 at best, so the ability for export volume to grow fast is limited. The rail line upgrade will probably be installed faster, suggesting that product can get from mine to port at reasonable price. However, the transport mode could continually look towards increasing container use to handle product over the next few years, though this is constrained by vessel and container capacity. Longer term, the future does look bright for the manganese industry, but there will be short-term bottlenecks in the system which will constrain flows.

Whilst ore export seems to be the main volume mover in the short term, part of a beneficiation drive will come through also installed capacity to increase manganese alloy production. Unfortunately, as with the chrome ore vs. ferrochrome industry this remains constrained due to power shortages.

Ferrochrome and chrome ore trade

Data just released by SARS (South African Revenue Service) highlights the major impact of South Africa’s power shortages through the ESKOM buy back of electricity from South African ferrochrome producers. The total export tonnage of (beneficiated) ferrochrome in 2012 fell 14.8% from 3.16mt to 2.69mt.

When broken down regionally, it can be seen that Asia — including Japan — collectively reduced by 23.8%, whilst Europe in fact grew slightly by 4.7%. The swing in figures between the Netherlands and Belgium is more likely to do with gateway port of arrival.

The massive declines however came in the RSA traditional markets of China, Japan, Korea and Taiwan, with large reductions to all as South African smelters reduced local production on the ESKOM buy back.

As RSA smelters shut down, this did not reduce Chinese demand for ferrochrome as Chinese smelting capacity continued to increase with the resultant continued demand for chrome ore, a resource China does not have locally. China ferrochrome demand (for stainless steel) was approximately 4.4mt in 2012 and only 1.5mt was imported as China reached similar levels of ferrochrome production as South Africa and will likely become the world’s number one producer from 2013. In simple terms this is a massive beneficiation switch from RSA ferrochrome production to China ferrochrome production, and flies in the face of the South African government plans to increase beneficiation. It is difficult to see how the price dynamics will change in the short to medium term although South Africa mooting an export tax on chrome ore exports might change flows although with no extra power for smelters it is unlikely this would result in any material change in the short term.

Chrome ore exports 2008–2012

These are detailed above, and show the rapid growth of chrome ore exports from 2010 primarily against rapid growth into China. This slowed in 2012 with some shift also into other more lucrative markets. A total of around 35–40% of South African chrome ore is shipped from Durban and largely in containers, whilst the balance is shipped through Maputo and Richards Bay in bulk.

In summary, there are exciting times ahead for South African bulk exports and notably in the iron ore and coal sectors where volumes of both could increase from a current combined 127mtpa to approximately 180mtpa (41% growth) by 2018. The key areas, however, are that the planned upgrades take place and the industrial climate allows the mining sector to deliver against this.