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Transnet Raises Rail Capacity to Handle Iron-Ore Rebound

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Transnet SOC Ltd. plans to almost double capacity on its South African iron-ore rail line as the state-owned operator looks beyond a slump in prices for the steelmaking ingredient and bets miners will raise production.

“Post this commodity crisis, iron ore will grow,” Transnet Freight Rail Chief Executive Officer Siyabonga Gama, 47, said in an interview in Bloomberg’s Johannesburg offices on Aug. 13. “So we will have a dedicated channel. Our philosophy is that we must create the capacity ahead of demand.”

TFR, as the unit is known, plans to raise capacity on the line to as many as 105 million metric tons annually from about 60 million tons, he said. The 861-kilometer (535-mile) track links mines in Northern Cape, where Anglo American Plc’s Kumba Iron Ore unit runs Sishen, Africa’s biggest operation for the material, to Saldanha, a port on the southwestern coast. The country is the continent’s largest producer of the mineral.

Iron ore has fallen 31 percent this year as companies from BHP Billiton Ltd. to Rio Tinto Group raised output, resulting in a supply glut. The economy of China, the biggest buyer, is forecast to expand at 7.4 percent this year, the weakest pace since 1990. Still, upgrading the line forms part of Transnet’s 210 billion-rand ($19.9 billion) plan to revamp rail after decades of underinvestment.

Trended Projections

“We invest for the long term,” said Gama, who worked at JPMorgan Chase & Co. in New York and at Standard Bank Group Ltd. before joining Transnet. “There will always be short-term cyclical shocks. For us, we need to understand more the trended projections and outlook from a global perspective.” He didn’t provide a time line for the increase to 105 million tons. Capacity will increase to 82.5 million tons by 2018.

TFR is struggling to meet the rail-transport needs of miners of manganese, another raw material used in steel. South Africa has the world’s largest known reserves and is the biggest producer, according to the U.S. Geological Survey.

Assmang Ltd., a unit of Johannesburg-based African Rainbow Minerals Ltd., Samancor Manganese, owned by Melbourne-based BHP Billiton, and Anglo American are the three main producers of the mineral in the Kalahari Basin region.

The country exports about 10.5 million tons of the commodity annually, with 3 million tons being transported by truck to ports at Richards Bay, Durban and Port Elizabeth, Gama said.

Transnet will spend about 16.9 billion rand on rail lines from the Kalahari Basin to a new, dedicated manganese terminal at the southern port of Ngqura, next to Port Elizabeth, he said.

Free Backbone

The total cost of the project is about 26 billion rand. After completion, the company will be able to handle about 16 million tons of the material annually from existing capacity of 5.5 million tons, he said.

“By 2019, everybody should be able to do what they can do in terms of mining capacity,” Gama said. “We want to free the logistics backbone of the country so that companies can compete and become world-class in their markets.”

South Africa is the continent’s biggest coal supplier, with most production in the eastern Mpumalanga province, where reserves are declining. Companies are now developing the largely untapped Waterberg Basin in the northern Limpopo province, which contains about 75 billion tons of coal, or 40 percent of South Africa’s resources, according to state power utility Eskom Holdings SOC Ltd.

Interim Waterberg

TFR plans to spend about 2 billion rand boosting capacity in the area to as many as 26 million tons by 2018 from 3 million tons now, and has signed memoranda in which 15 million tons to 18 million tons have been taken up, Gama said. Exxaro Resources Ltd., which operates the Grootegeluk mine, is TFR’s biggest client in the area.

As this interim capacity peaks, Transnet is looking at building a heavy-haul line that will link the Waterberg to the company’s main network. Studies will be completed next year, he said, with construction set to start in 2019.

The lines will connect the Waterberg to the Richards Bay Coal Terminal on the Indian Ocean, the world’s biggest export facility for the fuel.

TFR is also looking at hauling coal from mines in neighboring Botswana on a 105-kilometer extension to the existing network that would run across the Limpopo River.

“We are still far from any agreement with Botswana in terms of whether or not that’s going to happen,” Gama said.

Capacity on TFR’s coal line to RBCT will increase to 97.5 million tons annually by 2019, including Waterberg products, from 81 million tons once general freight moves onto a new track going through neighboring Swaziland, allowing the existing line to be solely dedicated to coal, Gama said.

The company is also doubling the Overvaal tunnel, which has created bottlenecks as it’s the only single section on the southern part of the line that runs from Ermelo in Mpumalanga to the terminal.

“The construction of the Swazi rail link will probably start in November 2015,” he said. “We are quite close to finalizing the actual business case.”

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