Catching a ride on the minerals train

The ANC is proposing that Transnet grant concessions to mining houses to build or upgrade rail infrastructure, but that price conditions be attached to users of the rail lines to extract competitive input costs for the downstream industries.

Producers of iron ore and manganese — used in the production of steel — and coal could benefit most from the ANC’s suggestion that major mineral ore railway corridors be created through joint ventures between Transnet and ­private companies, or through a “user concession” model in which companies take over the running of the line for a minimum of 10 to 15 years.

But the trade-off is that users of these rail corridors would have to supply the iron ore, manganese and coal to the domestic market at cost-plus prices and, similarly, oblige their customers to sell at these reduced prices. There are all sorts of penalties, such as taxes and even the nationalisation of assets, if producers do not oblige.

Inadequate or ailing rail and port infrastructure has been hampering the growth of the mining sector, whose contribution to gross domestic product has shrunk from R103-billion in 1993 to R92-billion in 2009, despite a synchronised commodities boom.

Backlogs forcing companies to use road transport
Capital backlogs in rail investments have forced companies to use road transport to move mineral products, stunting the expansion of exports in Asia.

Although Transnet has earmarked R300-billion over the next seven years for infrastructure, it is not nearly enough to counter years of underspending and meet South Africa’s most immediate needs.

The ANC proposes a joint venture model in which the relevant rail lines are upgraded and funded jointly by Transnet and the user and a shareholders’ agreement is signed to protect their rights.

One of the conditions, though, is that coal users of the rail line would have to collectively transfer the requisite coal resources to Eskom for its security of supply.

Similarly, iron ore companies would have to collectively transfer between 500-million and one-billion tonnes of the resource back to the state, which is negotiating with a foreign player to establish an integrated steel plant.

Biggest player to be most affected
Kumba, the biggest producer of iron ore in South Africa, exporting more than 34.2-million tonnes a year, will be most affected by this.

Enoch Godongwana, head of the ANC’s economic transformation committee, told the Mail & Guardian this week that if companies such as Kumba “did not play ball” in providing the new steel player with competitive cost-plus iron ore prices, the government could whack the company with high export taxes.

Another option is that government could nationalise Kumba through section 25 of the Constitution, but it could take years because the parties would become embroiled in legal arguments on what is considered a fair price for the miner’s assets.

Alternatively, the ANC says a “user concession” model, which Mozambique has adopted, should have the following possible conditions:

  • Pricing of ore or coal to domestic customers at cost-plus prices, with an obligation on these customers to supply their products to the domestic market at these reduced prices;
  • Transfer of mineral rights of select resources back to the state;
  • Third-party access to the concession on non-discriminatory terms;
  • Payment of an annual concession fee to Transnet to compensate it for the potential revenue foregone;
  • Employment of all affected Transnet railway staff, with a five-year retrenchment moratorium, and the servicing of all pension, health and other commitments;
  • Continued servicing of other users at equivalent rates and conditions;
  • Transnet should retain a share of the concession of at least 15% to cater for small-scale users; and
  • All improvements or expansions will revert to Transnet at the end of the concession.
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