More jobs on the line as the rail crisis worsens

Over the past two years, Turnaround Talk has published a few articles pointing to the fact that Government is becoming a significant root cause of financial distress. These articles were met with admiration in some quarters but also received criticism. You can hardly blame Government for the mismanagement at South African Airways (SAA) was the most common narrative I received.

While this may be true, I stand by my statement that Government is playing a role as an agent of financial distress. We have seen this on numerous occasions outside of the SAA debacle, and we are currently seeing this being played out with Transnet. Recent reports point out that many jobs in the mining industry are now in jeopardy because of the rail and logistics crisis that has been going on since at least 2007.

Revised down

Fitch Solutions has revised South Africa mineral production growth forecasts for 2023 down from 0% to -1% y-o-y for iron ore, and from 2% to -2% y-o-y for platinum. The company expects iron ore production to amount to 65.7 million tons (mnt) in 2023 compared to 66.3 mnt in 2022, and platinum to amount to 4.2 million ounces (moz) in 2023 compared to 4.3 moz in 2022.

South Africa’s state-owned rail operator Transnet SOC has been struggling with a myriad of disruptions. Vandalism, maintenance backlogs, derailments and a lack of rail capacity have been upsetting transport operations. The company points out that these rail constraints have led to a significant build-up of iron ore stockpiles at mines and this has necessitated a decrease in production given the lack of available storage space.

According to Bloomberg reports in late February, only 800 kilotons of Kumba Iron Ore’s high-grade iron ore is at Saldanha port, with the rest stuck at its mines. This includes the giant Sishen open-pit operation in the Northern Cape province. Stockpiles are normally 4.5mnt to 5mnt.

Fitch Solutions points out that a comparable incident occurred last year where rail disruptions caused full-year coal exports from a critical South African port to hit their lowest level since 1993 despite a surge in demand from Europe as power producers sought to replace Russian supplies.

Anglo-American’s Kumba Iron Ore venture is one of the main producers of iron ore in South Africa. Kumba Iron Ore said its inventory surged 28% to 7.8mnt by the end of December 2022 from a year earlier. This cost the company about R10 billion in lost sales, mainly in the fourth quarter. Therefore, as a result of ongoing disruptions by Transnet, Anglo-American has adjusted its Kumba Iron Ore production outlook. Full-year production in 2023 was revised downward to 35 – 37 mnt (from 39 – 40 mnt). The outlook for 2024 is also down by similar estimates to 37 – 39 mnt (from 41- 43 mnt). It expects production to increase by 5% to 6% each year in 2024 and 2025 as rail performance improves.

Rail worries

Another article points out that Thapelo Malekutu, the National Union of Mineworkers’ Acting Regional Secretary for the Mpumalanga Highveld, said the union had already received warn­ings from three coal min­ing com­pan­ies of retrench­ments if the situ­ation does not improve.

Malekutu declined to reveal the com­pan­ies’ names to avoid sow­ing panic among work­ers.

“We have already been informed by min­ing com­pan­ies about the situ­ation on rail. Any time from now, we are wait­ing for formal processes where they want to con­sult about Sec­tion 189 [retrenchments]. Min­ing companies are com­plain­ing that they can­not move coal to the ports and that the coal price has dropped. In the past, even if they were trans­port­ing less, the price of coal was good but now it has dropped and they can­not trans­port enough,” Malekutu told the Sunday Times.

He said the min­ing com­pan­ies informed the union about pos­sible retrench­ments at a meet­ing last month.

“Nor­mally the com­pan­ies don’t just send out let­ters to the uni­ons about the issue. They try to make you aware before they form­ally com­mu­nic­ate so that you are not in shock.”

Road network problems

The article points out that Malekutu said trucks can­not move coal to the Richards Bay port quickly enough as they face prob­lems such as road acci­dents, strikes and break­downs.

The Min­er­als Coun­cil has said coal, iron ore and chrome miners are facing enorm­ous dif­fi­culties trans­port­ing their com­mod­it­ies to the port by rail.

Bonginkosi Mabaso, Chief Com­mer­cial Officer at Trans­net Freight Rail (TFR), said the coun­try’s rail capa­city has been con­strained by under­in­vest­ment, rising incid­ents of theft, and van­dal­ism.

Incid­ents have included dam­age to the rail net­work by so-called busi­ness for­ums as well as cable theft.

Irrefutable proof

There is a simple reason why I stand by my statement that Government is an agent of financial distress.

Indeed, Government may not be responsible for the mismanagement at SAA. When Government appointed the airline’s leadership (provided there was no nepotism involved), it was confident that it made the best choice armed with the information it had at the time. However, Government’s actions in the rolling out of the SAA business rescue – which is still ongoing almost three years later – is an issue that they have to take accountability for. How much more damage has been done to the company by Government’s stance of prolonging the rescue?

Let’s move onto loadshedding. If you presented a risk to a business in 2008 and warned them that this would only worsen over the next 15 years, any prudent businessperson would do all they can to address the risk immediately. Governments inaction over the loadshedding issue has caused liquidations in South Africa to increase. Further, Government now faces a bill of R235 billion and R372 billion to expand the national grid over the next decade. It is not like we have this kind of cash lying around, so how many more businesses will face liquidation before this issue is put to bed?

Finally, as with loadshedding, Government knew of Transnet’s challenges as far back as 2007 (and possibly before). Logistics experts (Academics, Professors and professionals with Doctorates in supply chain and logistics management) warned Government that this issue would not disappear with inaction and would only worsen. We are now faced with a situation where Transnet aims to transport the same tonnage to the Richards Bay Coal Terminal this year as it did in 2016 (7 years ago).

If the energy and rail crises are not resolved soon, 2007 & 2008 could become key years in the ANC failure narrative. Inaction for 16 years is costing us dearly now. President Cyril Ramaphosa has promised to allow more involvement from the private sector when it comes to driving economic growth. Have these assurances come ten years too late? Again, people will argue that Ramaphosa can hardly be blamed for the sins of the Jacob Zuma administration. But we need to ask what the ANC (as a collective) has done since 1994 to address the challenges we face now, not what leaders have done.

You can defend the ANC to the hilt; the fact that Government is an agent of financial distress is becoming increasingly undeniable.