The cost of South Africa’s deteriorating logistics network

The deterioration of South Africa’s logistics network has wide-ranging costs for the country and constraints in the logistics space are one of the biggest risks to the country’s trade performance and current account balance.

“Ongoing congestion at the Durban port threatens trade and production activity,” Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says.

“On a longer-term horizon, these inefficiencies result in lower market share, less competitive exports and prolonged weak economic growth.”

Van Papendorp and his colleagues, Sanisha Packirisamy, economist and Tshiamo Masike, economic analyst at Momentum Investments, warn in a report on external trade trends that the deterioration in the logistics network has wide-ranging costs.

It is estimated that the cost of rail inefficiencies is 6% of gross domestic product (GDP), mostly from coal, in 2022 and 4.9% of GDP in 2023.

Van Papendorp points out that the targets for general freight dropped significantly since 2019 accompanied by a widening gap between actual and targeted volumes.

“Coal and iron ore targets remained relatively the same since 2017 but the coal line experienced a widening gap between target and actual volumes since 2019, while iron ore only started recording a sizeable gap from 2021.”

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Lower coal and iron ore volumes can widen current account deficit

Packirisamy says a continuation of lower coal and iron ore freight rail volumes may result in a wider current account deficit as these minerals are part of South Africa’s top export category mineral products. In 2022, the value of exported mineral products accounted for 28% of total exports.

The decline in coal transported by rail necessitated a redirection to road transport along with other mined products. The average number of trucks per day in the first quarter of 2023 surpassed the average of the whole of 2022, illustrating the increasing dependence on roads as rail performance continues to deteriorate.

While the use of road transport reduces the impact of rail inefficiencies, it costs 40% more, according to Bloomberg.

Transnet inefficiencies extend from the rail network to the ports, Masike says.

Transnet manages eight commercial seaports in Cape Town, Durban (the largest port), East London, Mossel Bay, Ngqura, Port Elizabeth, Richards Bay and Saldanha.

The World Bank’s 2022 Container Port Performance Index included only four of the eight South African ports in its comparable assessment and Cape Town, Durban and Ngqura were ranked as some of the worst performing ports (bottom 10 of 348 ports) and Port Elizabeth was slightly better at position 291.

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Congestion’s cost at Durban port

The Durban port is gridlocked with approximately 63 vessels reported to be stuck during the fourth week of November 2023. According to Bloomberg, the backlog extends to about 100 vessels including those at Richards Bay, Cape Town and Gqeberha ports.

This congestion prompted MSC, the world’s largest container line, to impose a surcharge of US$210 per 20-foot container of dry cargo from 3 December 2023. Including the surcharge, the direct costs of the delay are estimated to amount to R98 million per day.

Masike says apart from costs, the ongoing congestion causes losses of much needed revenue for Transnet as well as the fiscus.

“The longer term impact could be subdued economic growth, declining competitiveness of South African exports and lower market share as importers and exporters opt for more efficient ports or alternative forms of transport.”

Mining Weekly recently reported that South Africa’s mineral producers are increasingly using Mozambique’s ports as an alternative given the mounting challenges in local ports and rail transport. “While some neighbouring countries may benefit, neighbouring countries that depend on South Africa as a point of entry may face difficulties,” she warns.

Van Papendorp says the impact of the port congestion will likely reflect negatively in the fourth quarter current account balance and GDP growth.

“Although weather is cited as one of the reasons for the ongoing port congestion, operational inefficiencies are a consequence of a multitude of factors that have been worsening over the years. The Presidency attributes the inefficient port and rail network to historical underinvestment in maintenance, security issues, such as cable theft and sabotage, idle equipment, underfunding for infrastructure, lack of governance, inefficient competition facilitation and slow procurement.”

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Transnet trying to resolve logistics issues

Transnet implemented a truck booking system to create order but this system reportedly causes further delays.

Implementation of the Freight Logistics Roadmap could potentially help address challenges in the logistics space, Van Papendorp says.

”The roadmap aims to improve operations and performance in the short term and transform the logistics system in the long term.”

Packirisamy says an important aspect of the roadmap is the intention to improve efficiency through private sector participation while government maintains ownership. The implementation of the roadmap will be coordinated by the recently established NLCC tasked with addressing challenges in the rail network and ports.

To complement the roadmap, Transnet developed a turnaround plan that “outlines operational and financial initiatives which must be implemented in the next six, 12 and 18 months to stabilise the business and position it for growth”.

Of the R100 billion requested by Transnet to implement the turnaround plan, National Treasury agreed to provide Transnet with a R47 billion loan guarantee facility.