Manganese, chrome industries seek answers to South Africa’s transport network woes

Fastmarkets explores the logistical challenges facing South African ore exports, from the perspective of chrome and manganese markets

Logistical woes in South Africa have been a perennial barrier to industries with major presences in the country such as manganese and chrome, which market participants are seeking to overcome, with some suggesting greater private sector involvement.

Organizational issues have been an ongoing problem in the country, with socio-political challenges such as protests disrupting trade flows, alongside issues such as electricity disruption, rising fuel costs – and ongoing issues across its transport network.

In response, state-owned logistics provider Transnet has laid out the parts of its strategy that cover how it is working with the private sector to improve the service.

Market sources on the ground in South Africa say road, rail and port logistics have long faced backlogs and delays, and these have been exacerbated in recent months by severe flooding in the province of KwaZulu-Natal, seriously affecting Durban – a key outlet, especially for chrome.

In recent weeks, chrome ore suppliers have increasingly reported shifting their material from South African ports to Maputo in Mozambique, but it appears this may not be a long-term solution with bottlenecks growing there as well.

Both chrome ore and manganese ore miners in South Africa have faced long-running challenges around moving material from their mines to port, and from port to end destinations, with suggestions that these challenges are now as bad as they have ever been.

While market participants agree that privatization on a large scale is relatively unlikely, at least in the short-term, and that wholesale privatization of the entire network is not necessarily the answer, they also agree that major changes are needed.

Transnet’s response

As the chorus of participants in South Africa’s chrome and manganese markets calling for privatization – in some form at least, whether through greater private sector involvement in the network as a whole, for example, or moving at least some of Transnet’s rail services into private hands – has become more vocal, Transnet has set out the plans it has in place to improve the network.

South African chrome ore, Transnet said, is seen as a major growth market for the company, with exports via Richards Bay and Durban, and also Maputo in neighboring Mozambique.

To allow for anticipated future demand, Transnet has said it is working with key stakeholders, including those in the private sector, “to increase export volumes and value chain efficiencies”.

The state-owned company has said this includes developing and implementing solutions, including a trial of pooling and sharing rolling stock with CFM (Mozambique Ports and Railways) to decrease train cycle times and reduce delays at border crossings between the two countries.

Transnet has also said it is engaging with chrome miners themselves to improve rail traffic efficiency, as well as to reduce security incidents.

“Efficiency improvement initiatives have been identified together with industry and are at various stages of planning and implementation,” a spokesperson for Transnet said.

Transnet Freight Rail (TFR) is also piloting a model under which it runs Maputo chrome and ferro-chrome trains with one locomotive type from origin to destination, as opposed to the previous model where TFR used two locomotive changes.

“The run-through model enables the organization to run a borderless train service with CFM from South Africa to the port of Maputo. TFR is seeing results where the transit time of the trains is reduced by six hours in one direction,” the spokesperson added.

The target, Transnet has said, is to move 21 chrome and/or ferro-chrome trains to Maputo per week, compared with the previous pace of 12 trains per week. This will translate to an additional 900,000 tonnes annualized for the current financial year, according to the company.

In the manganese market, Transnet added that from 2012 onward, it has implemented a multi-channel manganese ore export strategy, “supporting the exponential growth of the local manganese sector that shifted South Africa’s share of the global market from 24% to 36%.”

“More than 70% of current volumes are transported via rail, with road offering an alternative within operating affordability limits,” the spokesperson said.

“As a state-owned company, Transnet is also committed to drive the transformation of the mining sector and has successfully on-boarded seven new emerging miners through various capacity interventions to participate in the global manganese market.”

Transnet is also anticipating further expansion of manganese export capacity to be extremely capital intensive, it said, and partnerships with the private sector have been identified as “the primary route for capital development.”

Transnet is looking at initiatives to attract investment funding to “support, sustain and further expand export capacity for the manganese sector,” it said, including the introduction of private partnerships.

Private partnerships would be aimed at accelerating the development of a new bulk export terminal in the Port of Ngqura with initial capacity set at 16 million tonnes per year; expanding aligned inland rail capacity between Hotazel and the Port of Ngqura to serve the channel; and providing additional storage capacity at the Port of Saldanha, to increase export capacity in the Saldanha channel to 6 million tpy.

Through these partnership-driven investments, Transnet has said it is planning to use “a primarily dual-channel approach” to provide capacity for 22 million tpy of manganese in the medium term, with “auxiliary overflow and onboarding channels in line with the current multi-channel approach.”

In general, Transnet has said it is currently leveraging the private sector “in the provision of both infrastructure and operations, as part of implementation of its Growth and Renewal Strategy.”

The strategy, the Transnet spokesperson told Fastmarkets, is “founded on rebuilding the South African economy through collaborative multi-stakeholder initiatives.”

“Among other things, the strategy aims to crowd in private sector participants in a structured yet dynamic way, by collaborating to improve the value chains of eight focused commodity segments that represent over 80% of Transnet’s revenue,” the spokesperson said.

But this approach should not be misconstrued as privatization, Transnet added; instead, it is “a framework for private sector capital investment and operational involvement.”

Under this approach, the structure of the transaction and strategy for each business unit depend on the objectives to be achieved in each commodity segment, Transnet said. And when it assesses the business case for private sector involvement, it also carries out “a comprehensive financial model… on the value for money for Transnet.”

The view from the chrome market

In the metallurgical chrome ore market, participants’ priority appears to be moving material out of the country so that it can reach its end users.

They have not expressed any particular concern over the possibility that hypothetical improvement in the ability to move supply would have a dampening effect on prices, as activity in China – the key market for UG2/MG chrome ore – is the main driver.

Greater private involvement, to some extent, would therefore be welcome, according to a South African chrome ore seller.

“The private sector [would] bring a diverse level of expertise that could be beneficial in the efficient running of the transport system,” the chrome ore seller in South Africa said.

But the question remains, how likely is wider privatization?

“Privatization could possibly work, but it [would] take a long time to alleviate the current challenges because of the huge investment that [would] be required from the private sector,” the chrome ore seller added.

And a second chrome ore seller also acknowledged that, as of July, shipments were running more smoothly than they had been over the previous couple of months.

But there is still some skepticism among chrome market participants over whether there will be any more substantial reduction to the challenges they face.

“Privatization needed to happen a long time ago at a larger scale at all the ports and much faster than is being touted now,” a chrome ore trader in Europe said.

He added that any investment would need to go beyond ports alone.

“The only way for South Africa to overcome the long distance to trading partners in the EU, China, the US and the UK is through efficient supply chains,” the European chrome ore trader said.

Meanwhile, participants in the non-metallurgical chromite market have said transport difficulties have supported prices, describing “huge costs” to truck material from Johannesburg and Rustenburg in South Africa to Maputo, as a way to skirt the major backlogs in Durban and Richards Bay, with demurrage costs at one point of up to $40,000 a day.

But there is support to be found elsewhere, even if logistics do improve in some way, because production is still short, according to market sources.

“Prices on foundry sand still remain [strong] as supply is still tight. On the chemical grades, we have seen prices slightly coming down, but again, there is not much available, as chemical producers are all short of tonnages. It seems production problems and output are not what we expected,” a second chrome ore seller said.

And even as metallurgical grade prices have fallen, non-metallurgical grades have held steady. For example, Fastmarkets’ fortnightly assessment of the price of chromite, foundry, 46% Cr2O3 min, wet bulk, fob South Africa, has held at $330-360 per tonne since May 31.

The view from the manganese market

Among manganese market participants, there is some concern that with improvement to the service, whether from private involvement or state-run changes, the potential for additional capacity to move material could remove supply tightness and in turn, eliminate a key area of price support.

“If there was additional capacity available to miners, it would result in increased production and lower ore prices,” a manganese ore producer source said. “The producers would pump up their output because if they don’t, their neighbors would anyway.”

Assuming optimal functionality, rail would be the most efficient way for South African miners to move material to the country’s ports or to Maputo in Mozambique.

Under the present circumstances, according to manganese market participants, miners can move defined volumes of ore to port via rail. This puts a cap South Africa’s on exports of material transported by rail because the available capacity is fixed.

Besides rail, additional ore volumes can also be moved to ports via road, but this carries additional cost and is also hampered by rising competition from other commodities, and especially coal in recent months, as the world looked to suppliers outside Russia in the wake of the invasion of Ukraine, sources have said.

Therefore, in the case of manganese ore particularly, road transport is only used when ore prices are high enough to make it profitable.

If rail capacity is increased, a manganese ore trader said, a substantial volume of material moved by road could shift over to rail, automatically reducing export costs, and in turn, potentially dampening prices.

How does the market see privatization?

Market participants themselves have proposed a few possible ways in which additional private involvement could work – but there are caveats.

In terms of improvements to rail transport, one possibility could be for the railway track and infrastructure, such as bridges, to remain in Transnet’s hands, while miners could have the option to use their own rolling stock at a reduced fee, or to pay for the use of Transnet’s wagons, according to a second manganese ore producer source.

There would be a price advantage for miners with their own wagons, the second producer source suggested, facilitating the movement of more material at a lower cost, and in turn, potentially creating an incentive to increase production.

“If you had your own wagons, then your margins would improve in comparison to the other producers and you [might] produce more – and this would put prices under pressure,” the second manganese ore producer source said.

But he added that this structure would likely benefit incumbents and large companies, rather than new arrivals to the market.

Alternatively, a dedicated rail line could be introduced for the manganese ore market alone, although this may be unlikely from a cost/benefit perspective, according to a third manganese ore producer source.

“A dedicated railway line is not likely, as the quantity of manganese ore transported would not support a new line. Typically, one needs 40-60 million tonnes to make a railway line work. So, the solution [would] need to build upon the existing infrastructure,” the third manganese ore producer source said.

One further solution could be to put the equipment at ports into private hands, according to a chrome producer source in South Africa.

“If the equipment is privatized, the benefit of that wouldn’t necessarily be a cost reduction, but rather it should result in security of shipment [timing],” he said.

“That’s what we’re trying to do – improve the timeous loading of vessels. That has many factors – rail is [also] part of it,” the chrome producer source said.

Fastmarkets analysts’ view

On the metallurgical chrome ore side, it is unlikely that improvements to logistics in South Africa would have a major impact on prices, according to Robert Cartman, senior research analyst at Fastmarkets.

“Prices might be slightly lower, if you’ve increased capacity to export and lower transport costs, but nothing significant. I suppose there would be more of an impact on how chrome ore is exported in terms of route taken,” Cartman said.

“My opinion that the impact on prices would not be overly significant is based on the fact that there does not appear to have been any significant increase in prices because of this in recent years, or even recently with the flooding and protests,” he added.

Indeed, while there was some upward movement in Fastmarkets’ chrome ore South Africa UG2/MG concentrates index, cif China, in April, for example, at the height of the flooding, the key driver has instead been activity in China, and especially the trajectory of downstream alloy tender prices set by major steel producers.

While chrome ore prices also rose sharply across 2021, Cartman added, this was more closely linked to the boom in ferro-chrome output in China than other factors.

The solution instead, Cartman suggested, may be to turn the focus onto Maputo, which is increasingly popular among chrome exporters.

“There has been growing use of shipping via Mozambique – shipments of chrome ore from there accounted for almost 60% of total shipments in both April and May, compared to more like 30-35% usually, a share that had been rising anyway over the past 10 years,” he said.

While there have been reports of growing bottlenecks, with some chrome market participants reporting delays of up to three weeks, as well as news reports in July that truckers and taxi drivers protesting surging fuel costs had blocked roads through Mbombela in South Africa’s Mpumalanga province – part of a key route to Maputo – Cartman’s view is that there is scope to scale up at the port.

“The long-term move toward Mozambique is clear and is only likely to continue given the expansions to capacity and modernizations taking place there, assuming the transport offering in South Africa remains the same,” he said.

At the same time, with high fuel prices and energy costs in South Africa, and Maputo’s proximity to several chrome mines, it may be the preferred option.

On the manganese side, Harry Riley-Gould, research analyst at Fastmarkets, argued that the relationship between logistics and prices was negligible, adding that the market was also more driven by Chinese activity, such as renewed lockdowns in the wake of a resurgence in Covid-19.

“China typically takes around 60% of South African exports, and shipments over January to June 2022 were down by 39% from July to December 2021,” Riley-Gould said.

“Over the long-term, the relationship between South African manganese ore exports and prices for 37% manganese ore fob Port Elizabeth is minimal. Across the 10-year period 2011-2021, increases or decreases in exports were not consistently accompanied by comparable increases or decreases in ore prices,” he added.

But this is not to say there is no scope for this to change.

“The relationship between the two does appear to have firmed somewhat over recent years: every 500,000-tonne quarter-on-quarter increase in ore exports was associated with a rough 40-cent-per-dry-metric-tonne-unit decrease in fob Port Elizabeth prices over the past eight quarters [third quarter of 2020 to second quarter of 2022],” Riley-Gould said.

“This corresponds somewhat with a slight increase in South Africa’s share of global exports, which, at 30% in 2021, was the highest since at least 2010, and compares to an average of 26% over 2011-20,” he added.

The impact of an increase in output in the short- to medium-term would also be exacerbated by the slowdown facing the steel industries in various export markets, and especially China.

In theory, Riley-Gould said, this could cause an “outsized impact” from relatively smaller increases in output, given the macroeconomic headwinds likely to affect steel output, and in turn, manganese alloy and ore demand, for the rest of 2022.

Transnet’s strategy sets out clear goals on the path to improving the transport network in South Africa; but the chrome and manganese markets remain uncertain on whether they will see the dramatic changes they say are needed.

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