State-owned freight logistics group Transnet insisted on Thursday that its R340-billion to R380-billion Market Demand Strategy (MDS) remained intact, but confirmed that some components of the investment plan could be deferred in light of the weaker commodity outlook and South Africa’s lower growth performance.

The MDS cycle had also been extended from seven to ten years in an effort to bring the roll-out in line with what was expected to be a protracted period of commodity market weakness. The utility rails various commodities, with major capital expenditure (capex) planned under the MDS for its export coal and iron-ore corridors.

Speaking at the group’s interim results presentation, acting CEO Siyabonga Gama dismissed reports that the MDS could be cut by up to R200-billion, arguing instead that the strategy of creating logistics capacity ahead of demand would proceed on the basis of “validated” demand.

“The investments that Transnet makes have to be in line with what the market requires,” Gama said, stressing that any deferment should not be read as Transnet pulling back from its expenditure. If fact, he argued that its capex programme would result in the group doubling in size over the coming six years from a current asset base of R349-billion.

“It’s a counter-cyclical strategy, but if some of the cycles move out by three or four years, we are going to have to move that investment out.”

Acting CFO Garry Pita explained that, as a “commodity-driven business”, it was particularly sensitive to commodity cycles and was, thus, in ongoing communication with its mining clients on their capex plans so as to “validate” the MDS.

During the current downturn the entire capital portfolio would be interrogated “to ensure that we still create capacity ahead of demand, but time it correctly”.

Pita added that the extension of the MDS horizon by three years had been premised on a bottoming out of the commodity cycle in 2016, with a slow rebound from 2017/18 onwards and a recovery to 2011/12 prices in ten years.

“A lot of the large organisations have a ten-year outlook and [now] so does Transnet.”

Including the R108.9-billion invested since the official launch of the MDS in 2012, Gama said that Transnet remained committed to investing around “half-a-trillion rand” under the aegis of rolling investment strategy. During the interim period Transnet invested R16.1-billion.

However, the “fourth period of the MDS implementation had proved challenging”, with the South African economy performing well below the 3.8% growth assumption in the plan.

The South African economy grew by only 1.4% in 2014 and, in his Medium-Term Budget Policy Statement Finance Minister Nhlanhla Nene cut the growth forecast for 2015 to 1.5%, from 2%, and also reduced the 2016 forecast to 1.7%, from 2.4%.

Volume growth was, therefore, unlikely to match the 2012 assumptions, especially for coal and iron-ore, when the MDS was forecasting export coal volumes growing from 68-million tons yearly to 98-million by 2020 and iron-ore from 53-million tons yearly to 83-million tons.

During the six months to September 30, export coal volumes were 3% lower period-on-period to 35.4-million tons and Transnet was currently anticipating that volumes for the year would be 2% below the 76.3-million tons railed in 2014/15.

Iron-ore volumes in the interim period recovered by 7% to 30-million tons and were expected to rise 0.5% for the year as a whole to nearly 60-million tons. However, the ramp-up to the 83-million target was likely to be deferred beyond the 2020 target.

During the six months, group revenue rose 6.4% to R32.2-billion, but profit for the period fell 17.1% to R1.78-billion, owing mainly to a 19.7% rise in depreciation, derecognition and amortisation to R6.89-billion.