May 15 (Bloomberg) -- Graham Soko, a shopkeeper whose business straddles the railway line south of Lusaka station in Zambia’s capital, says he’s hoping to reap profits from the government’s plans to rejuvenate the dilapidated railway system.
“We need a well-developed, modern one,” he said as a radio played in his shop, named All Types of Groceries. “People will be using the facility so I expect our business to improve as we start seeing more people coming to buy items.”
Railway operators in landlocked Zambia, the southern African nation that’s the continent’s biggest copper producer, plan to invest as much as $1.5 billion over the next five years to upgrade the 1,200-kilometer (746-mile) system that President Michael Sata in November said had “deteriorated beyond description.” The nation plans to boost rail volumes almost 10-fold by 2016, cutting costs for companies including Glencore Xstrata Plc and Vedanta Resources Plc as they increase output.
The government in September canceled an operating concession with a South African company for Zambia Railways Ltd., appointed new management for the state-owned operator and gave it $120 million of the $750 million raised in the nation’s debut Eurobond. The company started running inter-mine trains for the first time since 2008 last month. Vedanta’s local unit, Konkola Copper Mines, said the cost savings will be “huge.”
“Rehabilitating the old rail lines between Zambia-Angola-Namibia and Zambia-Tanzania could help ease costs for copper miners like First Quantum and Vedanta, given significant transportation costs to get copper from mines in Zambia to port,” Patrick Jones, a London-based analyst with Nomura International Plc, said in an e-mail on May 3.
Zambia’s efforts are part of a continent-wide push to improve infrastructure. Kenya is moving to spend $25 billion on a second port, a crude pipeline and roads, while Nigeria is spending more than $3 billion to build about 300 kilometers of rail lines in the next three years. In West Africa, an iron-ore boom is motivating miners including Rio Tinto Plc to spend $25 billion on railways and ports, according to JPMorgan Chase & Co.
Even if Zambia Railways succeeds in offering a competitive and reliable alternative to road transport, there are bottlenecks within and beyond its borders.
Tanzania-Zambia Railway Authority, owned by the two governments, operates a 1,860-kilometer line and has suffered from poor management and maintenance since it was built using Chinese aid in the 1970s.
The authority is “limping” and is “a child in the hospital in a terrible state -- almost like terminal illness,” Zambia Railways Acting Chief Executive Officer Muyenga Atanga said in a May 9 interview at Lusaka station.
There are also capacity issues with a Zimbabwean operator that Zambia Railways uses to move its freight to Durban in South Africa. The company has approached the government to take up the matter with counterparts in Zimbabwe, he said.
Last month, President Sata suspended Zambia Railways CEO Clive Chirwa following graft accusations. The suspension has “no impact whatsoever” on the company’s plans, said Atanga.
“Without substantial investment and improved management it is hard to envisage the railways ever again being competitive with trucks,” said a 2011 report by the Zambia Institute for Policy Analysis and Research, known as Zipar.
Copper, used for pipes, wires and cables, accounts for more than 70 percent of Zambia’s export earnings. Output is expected to climb 34 percent to 1.1 million metric tons annually by 2015 from now, Mines Minister Yamfwa Mukanga said on April 18.
Less than 30 percent of the metal is moved by train, Zipar said. The rest is moved by truck, which uses more energy.
The government has agreed to lend Zambia Railways an extra $50 million for its projects, said Atanga.
Yields on the country’s dollar debt due in September 2022 have climbed 53 basis points since being sold eight months ago, to 5.70 percent yesterday. The rates have risen on concern that the debut bond in the U.S. currency has paved the way for record issuance that risks overstretching government borrowing, Ricardo da Camara, a fixed-income analyst at NKC Independent Economists, said by e-mail on May 3.
The nation’s rail volumes plummeted to 690,000 tons in 2009 from more than 6 million tons in 1975 as production declined, Zipar said in the October 2011 report. Copper output fell to 257,000 tons in 2000 from 750,000 tons in 1973 after the government nationalized the southern African country’s mines in the 1970s, according to the Chamber of Mines.
Zambia Railways has more than doubled the trains it dispatches every month to about 68 and plans to increase rail volumes by two thirds this year to 1.1 million tons, said Atanga, who also serves as permanent secretary in the Ministry of Transport, Works, Supply and Communication.
“In three years we can look at getting to four to six million tons,” he said.
Mopani Copper Mines, 73.1 percent owned by Glencore Xstrata, is working with Zambia Railways to return to using rail for some of its copper exports, Charles Watenphul, a spokesman for Baar, Switzerland-based Glencore Xstrata, said by phone from on May 10.
Vedanta’s Konkola plans to move 70,000 tons of the metal using trains by March next year, Joy Sata, a spokeswoman, said on April 2. KCM, as the company is known, transports 70 percent of its copper by truck from Chingola to Kapiri Mposhi, about 210 kilometers away, Sata said. The metal is then transported by rail to the Tanzanian port of Dar es Salaam, about 1,400 kilometers northeast.
The rest is moved by road to the docks at South Africa’s eastern port city of Durban, about 2,600 kilometers away. Glencore’s Mopani only uses trucks to transport the metal.
Trucks use two to 18 times more energy than rail to move one ton of goods over the same distance, Stephan Krygsman, an associate professor of transport economics at Stellenbosch University in South Africa’s Western Cape province, said in a May 8 e-mail. Zambia’s government raised diesel prices by 22 percent on May 1, more than triple the annual inflation rate of 6.5 percent in April.
Zambia’s gross domestic product may rise by 7.8 percent in 2013, the International Monetary Fund said in an April report. The economy grew an estimated 7.3 percent last year, the central bank said on Feb. 21. Copper for three-month delivery fell 1.5 percent to $7,137 a ton by 12:16 p.m. in London, extending the decline this year to 10 percent.
Security also improves with the shift of more copper to rail, Konkola’s Sata said by e-mail on May 8. The company lost 60,000 tons of finished copper because of theft in South Africa between April and June last year, she said.
For the Zambian government, the equation in boosting rail transport is simple.
“The more copper you move, the more revenue you get,” said Atanga.
To contact the reporter on this story: Matthew Hill in Johannesburg at email@example.com