Coal Rail Dynamics Supportive Of Forecasts

BMI View:  Rail infrastructure remains our favoured segment within South Africa's infrastructure sector, owing to continued demand for increased capacity to transport minerals. With underutilised port capacity and demand set to grow from the country's power sector, coal rail projects in particular offer the most supportive demand dynamics. 

The issuance of tenders for the prefeasibility studies of upgrading the rail link between the coal-mining town of Lephalale, in the Waterberg area of Limpopo, and the key coal-logistics junction at Ermelo, in Mpumalanga, is in line with our view of the rail sector in South Africa to be the outperforming infrastructure segment.

South Africa has failed to maximise its potential coal exports during recent years of commodity prices booming due to logistical bottlenecks preventing the 91mtpa capacity of the Richards Bay Coal Terminal (RBCT) being fully utilised.  Transnet is undertaking a ZAR200bn (USD18bn) overhaul and upgrade of its rail logistics operations, including adding an additional 700km of rail network. The cost of the new line linking the Waterberg mining area to Ermelo, which already connects to the RBCT, including wagons, rolling stock and other necessary infrastructure, is estimated to stand at around ZAR37bn (USD4.6bn).

Commodity Exports Driving Rail Investment
Railways Infrastructure Industry Growth vs Infrastructure Industry Growth

BMI View:  Rail infrastructure remains our favoured segment within South Africa's infrastructure sector, owing to continued demand for increased capacity to transport minerals. With underutilised port capacity and demand set to grow from the country's power sector, coal rail projects in particular offer the most supportive demand dynamics. 

The issuance of tenders for the prefeasibility studies of upgrading the rail link between the coal-mining town of Lephalale, in the Waterberg area of Limpopo, and the key coal-logistics junction at Ermelo, in Mpumalanga, is in line with our view of the rail sector in South Africa to be the outperforming infrastructure segment.

South Africa has failed to maximise its potential coal exports during recent years of commodity prices booming due to logistical bottlenecks preventing the 91mtpa capacity of the Richards Bay Coal Terminal (RBCT) being fully utilised.  Transnet is undertaking a ZAR200bn (USD18bn) overhaul and upgrade of its rail logistics operations, including adding an additional 700km of rail network. The cost of the new line linking the Waterberg mining area to Ermelo, which already connects to the RBCT, including wagons, rolling stock and other necessary infrastructure, is estimated to stand at around ZAR37bn (USD4.6bn).

Commodity Exports Driving Rail Investment
Railways Infrastructure Industry Growth vs Infrastructure Industry Growth

Overall we have been cautious on Transnet's ambitious capital expenditure plans on account of their sheer cost in an environment of weakening commodity prices, a sluggish growth story in South Africa and the weak rand making raising capital particularly expensive. 

However, those projects geared towards the transportation of coal, such as the proposed link between Lephalale and Ermelo, are in our view some of the most viable. The planned line upgrade to will see the current capacity of the region to move coal lifted from 4mtpa to around 20mtpa by 2018, with the potential to boost that to 80mtpa in the future. The new infrastructure is planned in line with new mine developments in the Waterberg region and coal demand from South Africa's power utility Eskom. Eskom currently relies heavily on the Witbank area for its coal supplies, however they are nearing depletion and as such Waterberg is set to be the focus of a wave of infrastructure developments to supply the region's coal fired power plants.  

Infrastructure Needed To Facilitate Supply And Demand
South Africa Coal Production and Coal Fired Electricity Generation, % Change year-on-year

BMI's Mining team is bullish on the prospects of South African coal production and even though BMI's Power team are forecasting around 2.6% average yearly growth in coal fired electricity generation between 2014 and 2023 which will eat into domestic supplies, we expect the tonnage of coal heading for export to increase markedly. As such increased domestic power demand and growing production are heavily supportive of the connection of Lephalale to the coal export corridor and the RBCT.

Risks Remain

Considering the supporting factors, the likelihood of the expanded capacity of South Africa coal export line being realised is good. However, we continue to note the downside risks to the project's timely implementation. Infrastructure projects in general in South Africa are often heavily delayed. Additionally, it is not yet clear how Transnet intend to fund the line, with the private sector potentially being offered a role in its construction. That said, with South Africa's Infrastructure Bill coming into use on July 1st 2014, and the strategic importance of South Africa's coal reserves to the wider economy both in terms of power generation and export revenues, the Waterberg rail line could be in line for strong support from the government.

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This article is tagged to:
Sector: Mining, Infrastructure, Freight Transport
Geography: South Africa
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