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Transnet pares back capex as commodity slump impacts demand

Transnet CFO Garry Pita
Transnet CEO Siyabonga Gama

Transnet CEO Siyabonga Gama and CFO Garry Pita on the capex outlook for the group. Camera Work & Editing: Nicholas Boyd. Recorded: 27.6.2016

Transnet CFO Garry Pita

Photo by Duane Daws

Transnet CEO Siyabonga Gama

Photo by Duane Daws

27th June 2016

By: Terence Creamer

Creamer Media Editor

  

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State-owned freight logistics group Transnet has pared back its 2016/17 capital expenditure (capex) plan in line with its strategy of “validating” demand ahead of moving ahead with major investments.

The rail, ports and pipelines utility expects to invest around R22.8-billion during the 2017 financial year, having already reduced its capex in 2016 to R29.6-billion, from a peak of R33.6-billion in 2015.

However, CEO Siyabonga Gama stressed at the group’s results announcement on Monday that it would still invest R340-billion to R380-billion over the coming ten years, as part of its much vaunted market demand strategy (MDS) to expand capacity ahead of demand.

He also underlined that Transnet had invested R124-billion since the start of the MDS in 2012, despite lower than assumed volumes and gross domestic product (GDP) growth.

Nevertheless, the immediate outlook had been affected mainly by lower commodity prices, which, in turn, had led to a deferment of a number of planned investments, particularly in relation to coal and iron-ore.

CFO Garry Pita said that R12.1-billion of iron-ore-related capex had been deferred, owing to lower validated demand from the sector, while Gama indicated that two major coal-related investments would materialise later than initially anticipated.

The plan to open up the coal export line to the Waterberg coalfields was now only expected to materialise in 2021/22, while the trigger had not yet been pulled on the Swazi Rail Link – a proposal to invest in a new line through Swaziland in an effort to liberate additional capacity on the Richards Bay corridor for additional coal exports.

Transnet expects coal volumes to recover modestly in the current financial year to 75-million tons from 72.1-million tons, but to remain below the 76.3-million railed in 2015. The 2012 MDS, meanwhile, had assumed that coal volumes would have climbed to 84-million tons in 2016/17.

Likewise, iron-ore volumes were expected to fall well short of the 70-million tons assumed for 2016/17, having slumped 3% in 2015/16 to 58-million tons.

Gama indicated that the group’s immediate focus was on capturing greater general-frieght market share from road, while diversifying away from its current reliance on mined commodities.

“We continue to move apace in the general freight business (GFB) side, because we think that’s where the greatest opportunity is going to lie,” Gama said.

Over the MDS period, Transnet expected to invest R111.7-billion to support GFB, with a large locomotive procurement already under way to add 1 064 new diesel and electric locomotives to its network.

That said, mineral-related projects remained a major feature of both the MDS, as well as Transnet’s so-called private sector participation (PSP) projects.

Over the MDS period, Transnet will invest R15.7-billion to sustain iron-ore capacity at 60-million tons a year, while R22.5-billion is to be invested on the coal corridors and a further R18.8-billion to raise the capacity of manganese exports to 16-million tons.

PRIVATE PARTNERSHIPS

The key commodity-related PSP projects have been listed as the Waterberg Consolidation project, in Lephalale, as well as funding of a heavy-haul coal link out of the Limpopo province, the Swazi Link project and the Manganese Common User Facility, in Mamatwan.

These public–private partnership projects, together with inland port and branch-line concessions, as well as various others at the ports and the rest of the region, could, in Transnet’s estimate, facilitate infrastructure investment of R50-billion to R60-billion in addition to its MDS investments.

The downward revision to the capex plan also has material funding implications for the group, which funds one-third of all investments using debt.

“We were going to go to the market for R125-billion and now with the new numbers, over the next seven years, it will be R97.5-billion,” Pita revealed, adding that it was unlikely to tap the global market in the near term, owing to rand volatility.

“Liquidity risk is very low. We have R13.9-billion of cash in hand at year-end and we had R17-billion available within a 24-hour turnaround – that’s R31-billion available to meet any obligations.”

Despite the lower commodity volumes, Transnet announced a 1.7% rise in revenue to R62.2-billion, which it said was partly attributable to a 4.2% increase in rail containers and automotive volumes to 14.9-million tons and a 1.4% rise in petroleum volumes to 17.4-billion litres.

Edited by Creamer Media Reporter

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