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South Africa: the decline of steel hits Transnet results

By Xolisa Phillip, in Johannesburg
Posted on Friday, 15 November 2019 11:31

A steel bar is cut at a Highveld Steel plant, which has a manufacturing agreement with ArcelorMittal steel company, in Middleburg. REUTERS/Siphiwe Sibeko

 Transnet Freight Rail (TFR) continues to be the biggest revenue generator for one of Africa’s largest rail and ports operator.

In the six months ended on 30 September 2019, TFR contributed 51% of Transnet’s revenue of R38.7 billion ($2.6bn) up from R37.6 billion ($2.5bn) in 2018.

  • Transnet Engineering contributed 12% to the rail and ports company’s revenue generation in the period under review.
  • Transnet Port Terminals (16%), Transnet National Ports Authority (14%) and Transnet Pipelines (7%) brought in the rest of the logistics operator’s revenue.

Head and shoulders above peers

Transnet, wholly owned by the South African government, accounts to the department of public enterprises. Some of the regulatory approvals for its core operations are handled by the department of transport.

Operationally, Transnet is the exception among state-owned entities in that it funds its activities and has not developed an overreliance on government-guaranteed or state bailouts. A moderate proportion of its debt is guaranteed by the South African government.

Transnet has borrowings amounting to R124.8bn ($8.4bn), R3.5bn (2.8%) of which are guaranteed by the South African government.

But it has not escaped the scourge of state capture. It remains without a group CEO and its flagship procurement of 1,064 locomotives was steeped in controversy.

In its interim results presentation, Transnet noted that, although it had spent R34.6bn ($2.3bn) as of 30 September 2019, it experienced “slower than expected deliveries” for the locomotives.

Good and bad of economy

TRF is Transnet’s biggest operating division and serves as a bellwether for the performance of South Africa’s extractive activities for the export market.

Highlights from the period under review:

  • TRF’s revenue increased 3.5% to R22.8bn ($1.5bn) up from R22bn in 2018.
    Mineral mining rose 20.8% as a result of “demand and efficiency improvements”.
  • Manganese volumes went up 7.0% because of “capacity-creation initiatives, such as the 375-wagon long train on the Sishen-Saldanha ore line”.
  • The fast moving consumer goods market grew 21% because of “an early harvest, as well as an increase in raw sugar production, and high demand for barley”.
  • The chemicals, fertiliser and automotive sectors delivered growth of 5.9%, supported by “higher-than-expected customer demand”.

Steel weighs on results

However, the numbers from the overall freight business tell a different story.

  • Volumes decreased 2.3% “primarily as a result of the prevailing weak economic climate”, according to information reflected in Transnet’s interim results presentation.
  • The division experienced a 21.3% drop in cement and lime volumes.
  • The struggling steel sector dragged down volumes from the steel, iron and scrap sector by 12.5%.

“This was due to reduced demand from customers as a result of a decline in the steel sector,” Transnet said.

The steel industry has been in an extended period of decline. This crystallised with ArcelorMittal South Africa announcing to the market yesterday it was “winding down” its Saldanha steel operations in the Western Cape.

Fin24 reports trade and industry minister Ebrahim Patel saying it would better for ArcelorMittal to sell the Saldanha plant instead of closing it.

Engineering division on track

Strategically, the rail and ports operator views Transnet Engineering as its growth engine through, among other initiatives, sales of its TransAfrica Locomotives, aimed at costumers throughout the continent, via Transnet Holdings International.

In the period under review, Transnet Engineering posted a “satisfactory” performance, supported by “increased customer demand for […] products and services”.

Transnet Engineering “continues to play an integral role in supporting the company’s volume growth initiatives”, the company said.

Improved sales activities resulted in Transnet Engineering swinging back into a pre-tax profit of R319m ($21.4m). In 2018, Transnet Engineering posted a loss of R672m ($41m).

Future funding prospects

The board has expressed confidence in the group’s going concern status.

Recent activities that support this assumption include Transnet’s bond issuance, which attracted R661m ($44.3m). Transnet is also in advanced talks for R13.5bn ($904m) in long-term bilateral loan funding, it said.

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