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www.pwc.co.za
Laying the foundations forgrowth – What is rail’s rolein the big picture?
HEAVY HAUL RAILAFRICA
19th March 2014
Dr Andrew Shaw
PwC
Table of Contents
1. The link to Commodities 3
2. Africa ‘Gearing Up’ 7
3. A closer look at a few key African countries 15
4. The future of ‘Heavy Haul’ rail 24
5. Conclusion 27
2
PwC
The link to Commodities
3
PwC
Source: PwC Mine (2012) • The growing disconnect
Global commodity price & demand regaining strength
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2007 2008 2009 2010 2011 2012
Monthly average coal, copper, gold, iron orecommodity prices, HSBC Global Mining Index(2007 = 1)
Gold
Coal(Australianthermal)
Iron ore(CFR63.5%)
Copper
Source: Bloomberg, The World Bank
(April)
Source: The World Bank, AME Outlook
Source: The World Bank, BP Statistical Review of World Energy June 2011
429% increase
30% increase
-
1 .0
2.0
3.0
4.0
5.0
2005 2006 2007 2008 2009 2010 2011
Annual average CFR China iron ore prices, totalglobal iron ore production (2005 = 1)
Iron ore price Global iron ore production
245% increase
20% increase
-
0.5
1 .0
1.5
2.0
2.5
3.0
2005 2006 2007 2008 2009 2010 2011
Annual average Australian thermal coal prices,total global thermal coal production (2005 = 1)
Thermal coal price Global thermal coal production
PwC
Capital expenditure up to $98 billion by the top 40global miners
-
5
10
15
20
25
Capital expenditures by commodity($ billion)
2011
2010
-
5
10
15
20
25
30
35
Capital expenditures by location($ billion)
2011
Source: PwC Mine (2012) • The growing disconnect
Source: PwC Analysis
PwC
Iron ore leads the way = bulk of 2011’s EBIT gains
Source: PwC Analysis
-
20
40
60
80
100
120
Revenue by commodity ($ billion)
2011
-
10
20
30
40
50
60
70
EBIT by commodity ($ billion)
2011
Source: PwC Mine (2012) • The growing disconnect
PwC
Africa ‘Gearing Up’
7
PwC
Africa gearing up
Africa is the next place-to-be for doing business The lions follow the tigers:
• 6 of the top ten fastest growing economies 2001-10 were in Africa
• Between 2010 and 2016 it will be another 6
• Africa is home to 1 billion people
• By 2035, Africa’s labour force will be larger than China’s
Growing demand offers huge potential for T&L companies
8
PwC
10 Countries in profile
10 most relevant economies forT&L due to:
• Significantly high GDP
• Strong growth expectations
• Rich in natural resources
• Natural exit to land-lockedadjoining countries high transit traffic volumes
• Potential gateways to the region
• Rapidly improving transportinfrastructure
Coverage of all major regions:
• North Africa
• Sub-Saharan Africa (east, west andsouthern regions)
DRC
Angola
SouthAfrica
Mozam-bique
Tanzania
Kenya
EgyptAlgeria
Nigeria
Ghana
9
PwC
‘Sizing up’ the growth potential
The size of the bubbles represents the size of the economy (GDP 2012)Sources: World Bank, International Monetary Fund
AlgeriaUS$ 209bn
AngolaUS$ 115bn
DRCUS$ 17bn
EgyptUS$ 257bn
GhanaUS$ 40bn
KenyaUS$ 41bn
MozambiqueUS$ 14bn
NigeriaUS$ 270bn
South AfricaUS$ 384bn
TanzaniaUS$ 28bn
0
20
40
60
80
100
120
140
160
180
200
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%
GDP annual growth estimates for the period 2012-2017 shown as a % for each country
Esti
mate
dp
op
ula
tio
nas
at
mid
Octo
ber
2013
(Millio
ns)
10
PwC
Basis of the PwC “Africa Gearing Up” study
Use of leading independent economic consultants: Econometrix
The 5 –Pillar approach
1. Demographics & resources
2. Economics
3. Business environment
4. Trade & logistics
5. Transport infrastructure
Interviews with executives operating in Africa & industry specialists
Investment potential assessments
11
lAttractive
lAverage
lUnattractive
Strong Improvement Expected
Some Improvement Expected Stagnation / marginal change expected
PwC
Current state
Demographic& Resources
Economics BusinessEnvironment
Trade &Logistics
TransportInfrastructure
Algeria
Angola
DRC
Egypt
Ghana
Kenya
Mozambique
Nigeria
South Africa
Tanzania
l l lAttractive Average Unattractive
l
l l ll l
l l l l
l
l l ll
12
l
lll
lllll
l
l
l
ll
ll
PwC
5 Years forward
Demographic& Resources
Economics BusinessEnvironment
Trade &Logistics
TransportInfrastructure
ExpectedGrowth(GDP 2012-2017)
Algeria 3,6%
Angola 5,7%
DRC 8,6%
Egypt 3,4%
Ghana 5,9%
Kenya 6,2%
Mozambique 8,0%
Nigeria 6,8%
South Africa 3,0%
Tanzania 7,0%
Strong Improvement Expected
Stagnation / marginal change expected
l l lAttractive Average Unattractive
13Some Improvement Expected
PwC
The way Africa rollsFuture growth & development will rely on quality &efficiency of its transport networks
Mining,oil & gas
Retail &Consumer
Agriculture
Manufacture
Improvement in railand portinfrastructure
Efficient, securelogistics &improvement inroad, ports and airinfrastructure andcold storage
Efficient low-costlogistics supportingfresh produce andrapid export
Efficient low-costcross-border logisticsaligned to growth inbroader Africaneconomy
LogisticsRequirements
14
PwC
A closer look at a few key Africancountries
15
PwC
Business Environment
• 3rd largest African economy. Oil accounts for 98%of revenue and a current account surplus,
• Business environment rated weakest in SADC,
Trade and Logistics
• Improvement in customs, although logisticsperformance remains weak,
• Waiting times at Port of Luanda average 144hours, and traffic frequently diverted to WalvisBay. There are however considerable portexpansion plans,
• Road infrastructure dilapidated in the east, yet oneof Africa’s largest investors in road infrastructure.
Rail Infrastructure
• Rail rehabilitation has been ongoing since 2005,reconstructing 2,700 km of railway at a total costof US$ 3.3 Bill.
Country Highlights - Angola
16
PwC
Tanzania – a rapidly growing economyLiberalised trade regime and regional integration
Member of The East African Community (EAC) and TheSouthern African Development Community (SADC)
Fairly broad export base
Among the world’s fastest-growing economiesover the medium term (6.6%-7.2% between 2012-17)
Challenging business environment
Unskilled local workforce is a major challenge – 80% oflabour force employed in agricultural sector
Port of Dar es Salaam in competition withMombasa to become gateway to East Africa:
Good performance of port KPIs, but highshipping costs
Due to be expanded
17Africa gearing up
PwC
Business Environment
• 7% average annual growth rate over last decade,
• Improved trade integration, but corruptionremains a concern.
Trade and Logistics
• Diverse natural resources attracting investment,
• Logistics Performance Index shows significantimprovement over last few years,
• Port of Dar es Salaam remains a bottleneck,
Rail Infrastructure
• Infrastructure performs better than other Africancountry’s but rail requires significant investment,
• US$42 bill Chinese agreement to rehabilitate Tazara line.
• US$5.1 bill plan for Dar es Salaam - Kigali/Musongati line
• Mwambani (Tanga) port and rail project will create newlink to Lake Victoria
Country Highlights - Tanzania
18
PwC
Mozambique – a case in pointHow inadequate infrastructure can stall growth
Massive reserves of coal and natural gas thatcan’t get out
- Potential to be world’s 3rd largest exporter ofliquified natural gas
Estimate of $20-25 bn required for infrastructure
Major success stories:
• Expansion of energy sector – capacity exportedto South Africa
• $2bn bid for railway and port developments inpipeline
• Maputo Development Corridor
• Major private sector improvements eg. Vale &Nacala Railway Corridor
19
The weak institutional &business environment offers
massive potential forimprovement.
PwC
Business Environment
• 3rd poorest country in the world,
• Limited by bribery, corruption, red tape &Government decision making takes long.
Trade and Logistics
• Represents a natural entry point for its landlockedneighbors to the west but is frequently by-passed,
• Narrow export base dominated by aluminum.
Infrastructure
• Transport infrastructure investment of US$17planned, mostly connecting mining andagricultural clusters to export ports. Projectshampered by implementation delays,
• Significant need to upgrade and improve the railnetwork and connected ports.
• Heavy haul access linked to appropriate ports iskey to opening up Tete province.
Country Highlights – Mozambique
20
PwC
Business Environment
• Considered to have the largest endowments of mineralsin Africa,
• Weak business environment characterised by politicalturmoil.
Trade and Logistics
• Logistics potential limited by lack of infrastructure,
• Regulations and corruption in customs negativelyimpact trade and result in considerable delay,
Infrastructure
• Port infrastructure is poor and goods often divertedto Point Noire in Congo.
• Due to poor transport infrastructure country is poorlyconnected with much of the south focused on linkages toZambia, & then on to SA or Tanzania.
• Lobito to Kolwezi line & inland waterways would open upmineral export capability.
Country Highlights – DemocraticRepublic of Congo (DRC)
21
PwC
Nigeria, Nigeria, Nigeria…..10 out of 16 executives interviewed rate Nigeria
50% of population urbanised – attractive forretail/consumer sectors
Ranks world’s 4th fastest growing economy - oilexports & government stability
Already diversifying into agriculture (42% of GDP)
Ambitious plans by gov’t to expand infrastructure:
• Roads carry more than 90% of passengers & freight
• New deep sea port at Lekki planned to ease congestion
• $2bn Rail rehabilitation to reconstruct 2000km
22
PwC
Kenya - Entry point to East AfricaRising consumption and oil discoveries
Entry point to East African Community (EAC):
• Port of Mombasa faces congestions due to high demand
• Port of Lamu is one of the largest African portprojects
• Lamu planned to connect to South Sudan and Ethiopiavia rail and road (LAPSET corridor)
Diversified economy:
Large agricultural sector – largest tea producer inAfrica, largest exporter of flowers
Significant opportunity for growth in lightmanufacturing
Developed oil fields will change Kenya from a netoil importer to a net exporter of oil
23
PwC
The Future of ‘Heavy-haul’ Rail
24
PwC 25
Rail
Africa’s rail networks are generally inworse shape than its roads. In manycountries, rail is in poor repair and outof date. Rail investments are set toincrease in the coming years, but onlySouth Africa has implemented acomprehensive rail investmentstrategy.
Getting Around Africa’s Markets
Regional integration with new rail lines …has started in southern and easternAfrica. South Africa is collaborating withSwaziland. In the East, Tanzania isworking with neighbours Rwanda andBurundi on plans to link the gateway cityof Dar es Salaam with Kigali in Rwandaand Musongati in Burundi. And Kenya isalready connected to neighbouringUganda via rail. But rail integration inthe west is nearly nonexistent.
Trans-African corridors, gateways and infrastructure projects
PwC
Drivers for change in heavy-haul rail
• Keep pace with demand, and alignto the new commodity wave (post2008 crisis),
• Build more efficient supply chains,pit-to-port and port-to-market,
• Improve the port rail interface,
26
• Enhanced train/line capacity:
• Axle weight,
• Train length,
• Line capacity
• All of these possibly impacted by gauge.
PwC
Conclusions
27
DRC
Angola
SouthAfrica
Mozam-bique
Tanzania
Kenya
EgyptAlgeria
Nigeria
Ghana
PwC
Conclusion
There isevidence ofpost 2008globalcommodityprice &demandstrength incommodities
Ghana and Nigeriaoffer the greatestoverall investmentpotential of the groupPwC studied
Build more efficient railsupply chains. Need forgreater rail capacity toaddress commoditygrowth requirements
Countriessuch asSouth Africa,Tanzania,Kenya,Angola,Mozambiquehave majornew rail lineplans
South Africa hasimplemented acomprehensiverail investmentstrategy
Rail integrationin betweenAfricancountriesremains weakwithintegration inthe west almostnonexistent
There aremanyoperationalchallenges forrailways inAfrica with anumber ofconcessionshaving beingterminated
1
2
3
4
5
6
7
28
Thank You …
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Andrew ShawAssociate Director