Founder: Turnaround Talk
Two years after the farcical South African Airways business rescue, the public is starting to ask serious questions about Eskom. Far from the ideal candidate for business rescue, the breaking up of the utility into three operating units is the first step towards the implementation of an independent business review which is a key piece of informal restructuring which helps the directors and stakeholders of the company make key decisions on the company’s future. It also possibly clears the pawns on the chessboard to allow for meaningful change to be implemented.
A month ago, heavyweights within the African National Congress used the situation at the Post Office as a de facto soap box to indicate the possible death of the State-Owned Entity model.
If we read between the lines, we can see that the country is making massive moves into a positive direction. President Cyril Ramaphosa has mostly been a man of action and has backed up rumours and whispers with reform.
But we are not there quite yet. We need some kind of drama to take place before a definitive move to the right can be made. News24 reports that this drama may just be Transnet.
Freefalling
The article points out that Transnet is in free fall and it is throttling investment and will ultimately cause mines to close, industry leaders have warned.
Speaking at the McCloskey Southern African Coal Conference on Thursday, coal producers impacted by Transnet’s poor railing performance lamented the dire state of the coal line to the Richards Bay Coal Terminal (RBCT) at a time when demand for South African coal has jumped, and export coal prices are rocketing.
“Transnet was doing very well until 2019. All of a sudden, it is in free fall. It’s very concerning for the country,” said Vuslat Bayoglu, MD of Menar, a private investment company that owns several South African coal mines.
The article added that Bayoglu pointed out that, “in 1996, Transnet moved 56 million tons of coal to RBCT. It peaked in 2017 at 76 million tons, and in 2020, it was 72 million tons. Then, in 2021, it was 58 million tons and, whether you like it or not, we are looking at 49 million tons [for 2022]. This is a joke.”
In the same period, Bayoglu noted, Australia tripled its coal exports, and Indonesia’s grew sixfold.
The News24 article points out that Mike Teke, CEO of Seriti Resources, which produces coal for Eskom and the export market, said the low railing volumes juxtaposed with extraordinary export prices was “painful” for the industry.
Photo By: Daily Maverick
The industry has been collaborating with Transnet on the various issues facing the coal line, including cable theft and a shortage of locomotives which results from a legal dispute with a key equipment manufacturer in China.
The state-owned logistics company, however, stirred up ill will among some industry players when last month it issued them with letters terminating long-term coal export agreements based on a force majeure – a clause which frees parties from contractual obligation in the case of an extraordinary event.
The article adds that while certain companies have disputed the validity of the force majeure – and insiders have speculated on the true reasons behind the move – industry has continued to engage with Transnet to find a mutually acceptable solution.
The railing crisis is undoubtedly the biggest issue facing the coal industry at present. Transnet, however, declined to speak at the coal conference this year, the organisers said.
Bayoglu said the issue of locomotive spares was clearly major, another critical issue is the loss of skills resulting from a voluntary separation programme – something unions highlighted as a major risk in September last year.
Following in Eskom’s footsteps?
The News24 article points out that he said shying away from the clear issues at Transnet would replicate what has happened at Eskom, where failure to address issues head on and to take the necessary action has caused load shedding to haunt the economy for 14 years and counting.
“Again, we are trying to be politically correct,” Bayoglu said, adding however that the impact of the Transnet railing crisis will become apparent much quicker than with Eskom.
“With Transnet not railing the coal to the port, we cannot run the [mines]. So, what happens? You stockpile the product on the ground where you have limited space. And then you obviously have cashflow issues at some point. And then you close.”
As coal being a major export earner for South Africa, National Treasury will feel the effect of fewer dollars coming into the country too, he said, adding that railing problems extended to other bulk commodities like iron ore and chrome.
The article adds that RBCT is not designed to received coal by road, but many exporters have resorted to trucking coal to alternative ports to take advantage of export coal prices. This is however a temporary fix for significantly smaller loads and cannot be sustained when coal prices fall back below $100 a ton (compared with record highs of beyond $300 a ton currently).
“It is time that the leadership of this organisation [Transnet] start talking to us,” said Teke.
A disrupted playing field
At stake is the opportunity for South African coal mining companies to take advantage of a disrupted export market.
Indonesia, the world’s largest coal exporter briefly banned coal exports in January 2022 as the country battled with a severe energy crisis. This ban was lifted at the beginning of February 2022 as the energy crisis decreased. This would have been a perfect opportunity for South African coal miners to take advantage of increased demand and a supply gap.
This window of opportunity is not completely closed. Reports from Bloomberg point out that Indonesia’s Coal Miners Are Bracing for New Export Curbs.
New restrictions on overseas sales are possible in either April or August — when mine output is typically lower — to make sure local power plants have sufficient supply, according to Pandu Sjahrir, chairman of the Indonesian Coal Mining Association.
Photo By: RBCT
Key coal prices have roared to new records this month as utilities in Europe, along with other major consumers, hunt for alternatives to cargoes from Russia following the invasion of Ukraine. Asia’s benchmark Newcastle coal price jumped 35% to a new record of $353.75 a ton on Friday, according to a weekly index compiled by IHS Markit and Argus.
Root cause of distress
Whether we want to call it mismanagement or neglect, the fact that Transnet has achieved such a dramatic fall from grace is sad and now potentially dangerous.
In his book: Business Development. How to win profitable customers and clients, author Ian Cooper asks a simple question…if you were to lose one of your big clients or customers, what effect would that have on your business?
The answer seems simple on the surface…devastating. However, it highlights the need for continuous prospecting and looking for new business.
The case for South African coal miners is simple, they have to look for new business. Not only is Eskom increasing its dependence on renewables, South Africa is being looked as a key mover towards a Net Zero economy on the continent.
The immediate financial impact will be to the companies themselves. However, there are other impacts. Mpumalanga has many towns that are built around coal mining companies. These communities not only employed by the mines, but associated businesses have emerged around this. Therefore, a whole ecosystem is at risk.
We cannot flip a switch and hope the coal mining industry disappears. There is to much as stake. Coal miners are looking at export markets, but the Transnet saga is holding them back from this. The only other way around this is to ship the coal out of Maputo or Beira in Mozambique which comes with considerable cost implications.
It seems a bit prophetic that in July 2021, I wrote an article which pointed towards Governments role as an agent of financial distress. This is a challenge that needs to be addressed. Can Government confidently say that they are invested in creating employment and addressing the unemployment crisis when a major economic driver faces challenges of the magnitude highlighted in this article? The smart answer is no.
To answer the question asked at the beginning of the article…are we any closer to a resolution? We need to ask: what are trying to resolve? If we are trying to address the future of the SOE model? Then we possibly are quite close to a resolution. Are we closer to a resolution of Governments role as an agent of distress? That depends on the gravitation towards privately owned companies and their participation as economic drivers. We need to act quickly, time is of the essence and a lot is at stake.
