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COMMODITY NEWSBRIEFS: 6 MAY 2016

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Natasha.Havenga@transnet.net

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AUTOMOTIVE FAW SA SEES INCREASE IN SALES, EXPORTS, BUT INITIAL TARGETS PROVE ELUSIVE (Engineering News, 6/5/2016) FAW Vehicle Manufacturers South Africa (FAW SA) has seen a steady increase in sales and exports, following the opening of its Eastern Cape truck assembly plant in 2014. To date, FAW SA has recorded exports of 90 trucks. To be more specific, exports in the first four months of 2015 reached 29 units, increasing to 42 units for the same period this year. FAW truck sales in South Africa reached 215 units for the first four months of 2015, increasing to 291 units for the same period in 2016 – this in a domestic new-vehicle sales market expected to decline by around 10% this year. These positive numbers, however, are still some way off from the ambitious targets set by FAW when the Chinese manufacturer opened its Coega plant. FAW SA executive director Richard Leiter noted in 2015 that it was important for the company to improve its production volumes. “We need to reach 5 000 units a year in South Africa and sub-Saharan Africa in the not-too-distant future,” he said. This number included the reality that FAW SA would need to build between 2 000 and 3 000 units a year “within the next two to three years for export to sub-Saharan Africa, excluding South Africa”, he added. Leiter believed this was possible as FAW sold around 10 000 trucks a year in Africa from China, with FAW SA able to clinch a percentage of these sales. There are many advantages to sourcing FAW products from South Africa, the most important being time to market and, for Southern African Development Community and African Union (AU) countries, there are the added cost advantages enabled by import/export duty agreements, explains FAW SA marketing and strategy manager Cheng Zhang. From a cost point of view, African buyers can save truck import duties of between 25% and 40%, he notes. Another advantage of importing FAW trucks through South Africa is that customers can get their vehicles within 30 days – much sooner than from China, which requires three months between order placement and delivery, adds Zhang. He says FAW SA plans to supply trucks to almost all right-hand-drive African countries. However, the plan is to also assemble left-hand-drive vehicles, so that other AU countries may also reap duty benefits. INTERMODAL MARCH AIR FREIGHT VOLUMES DROP BY 2% (Engineering News, 6/5/2016) Global air freight volumes saw a 2% year-on-year drop in March, reflecting subdued growth in world trade, according to demand growth data released by the International Air Transport Association (IATA). This decline was exaggerated by the quarter’s comparison with a particularly strong start in 2015, when air freight volumes were boosted by the effects of the US West Coast seaports strike. The most significant fall in demand was reported by carriers in the Asia-Pacific region, and North

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America. Combined, these regions, which reported declines of 5.2% and 1.8% respectively, account for around 60% of global freight traffic. "It is shaping up to be another tough year for air cargo. February 2016 world trade volumes were only 0.4% higher than at the end of 2014,” said IATA director-general and CEO Tony Tyler, further noting that purchasing managers’ expectations showed little optimism for an early uptick. “The combination of fierce competition, capacity increases and stagnant demand makes this a very difficult environment in which to generate profit," he added. In contrast, freight capacity rose by 6.9% year-on-year, putting increased pressure on already struggling yields. African airlines saw a 3.1% drop in demand in March year-on-year, despite a more modest decline of 1.6% in the first quarter. Notably, Africa’s available freight tonne kilometres surged by 22% year-on-year in the first quarter, on the back of long-haul expansion, which was more than double the pace of any other region. INDUSTRIAL PRIVATE SECTOR OUTPUT FALLS FURTHER (News24, 6/5/2016) Activity in private sector shrank again in April, albeit at a slower pace than it had in the previous month, as output and new orders fell and companies cut jobs to the greatest extent on record, a survey showed on Thursday. The Standard Bank Purchasing Managers' Index (PMI), compiled by Markit, edged up to 47.9 in April from 47.0 in March but remained below the 50 mark which indicates expansion. "Output has been in contraction for 12 consecutive months and companies’ intentions to downscale are evident from the employment index falling to its lowest recorded level since the inception of the series," Standard Bank economist Kuvasha Naidoo said. "This could be due to a combination of both wage increases, which rose at a faster pace, as well as declining demand." Businesses are feeling the pressure of slowing growth in most industrialised economy. The Treasury cut its 2016 growth forecast to 0.9% in February from the 1.7% forecast earlier. The economy has struggled to create new jobs, leaving South Africa saddled with a chronically high unemployment rate of around 25% of the labour force. IRON IRON ORE PRICE DROPS BELOW $60 (Mining, 6/5/2016) On Thursday the Northern China benchmark iron ore price fell 2.5% to $59.50 per dry metric tonne (62% Fe CFR Tianjin port) according to data supplied by The Steel Index bringing losses so far this week to 8.7% as commodity investment fever among Chinese speculators begin to cool. Two weeks ago iron ore hit a 16-month high following an 11% jump over just two trading days amid frenzied trading on the Dalian Commodities Exchange where the world's most active iron ore price futures are traded. On Tuesday, Dalian iron ore futures closed 5.3% lower at 412.50 yuan or $63.35 a tonne after earlier in the day triggering so-called circuit breakers to curb excessive price movement for the umpteenth time in recent weeks. Volume on the day was a robust 217 million tonnes worth $7 billion, but things have quietened down from torrid levels in March and April when one billion tonnes in a single day was recorded. The more subdued trading is the result of a clampdown on rogue traders, higher margin requirements and trading fees, but volumes are up five-fold compared to last year. CHEMICALS SASOL FEELS THE BRUNT OF THE DROUGHT AND COMMODITY DOWNTURN (Mineweb, 6/5/2016) Sasol revealed a business on an even keel from an operational perspective following the release of 3rd quarter production figures on Thursday. While the company’s bread and butter – Energy – demonstrated stable production and sales volumes, the numbers for the Base Chemicals division seemed to indicate there might be a few nasty surprises when the company posts its full-year financial results following the end of the financial year in June. Base Chemicals, which comprises polymers, solvents, fertilizers and explosives, saw “normalised” sales volumes falling by 9% to 2 207 thousand tonnes (Kt) versus the corresponding period for the nine months to end-March last year. The biggest decline was seen in fertilizers, where sales volumes fell by 28% as a result of the “impact of current drought conditions in Southern Africa and the closure of the bulk blending facility from the 30th of June 2015.” Sales from the company’s Energy division – which comprises liquid fuels, natural gas, and methane-rich gas – were largely in line with last year’s performance. Crude oil processing at Natref was stable, but production from Oryx GTL was 6% lower due to an extended shutdown of the facility in Qatar. While overall sales volumes and revenues in the Performance Chemicals division were stable, there was a notable decline in the feedstock cost

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per ton (input) which fell 20% to R7 242. This suggests a positive surprise might be in the offing when the division reports financial results. Saleable production from mining was marginally higher at 29.8 million tonnes. COAL MAPPED – THE GLOBAL COAL TRADE (Carbonbrief, 6/5/2016) The global coal trade doubled in the decade to 2012 as a coal-fuelled boom took hold in Asia. Now, the coal trade seems to have stalled, or even gone into reverse. This change of fortune has devastated the coal mining industry, with Peabody – the world’s largest private coal-mining company – the latest of 50 US firms to file for bankruptcy. It could also be a turning point for the climate, with the continued burning of coal the biggest difference between business-as-usual emissions and avoiding dangerous climate change. Carbon Brief has produced a series of maps and interactive charts to show how the global coal trade is changing. As well as providing a global overview, we focus on a few key countries. The map above illustrates the global coal trade in 2014, the most recent year for which complete data is available. It should be immediately obvious that Asia is at the heart of this story. Nearly 1,400 million tonnes (Mt) of coal were traded in 2014, with the majority flowing from the top two exporters: Indonesia (417Mt, worth around $20bn) and Australia (387Mt, about $35bn). Australian coal is generally better quality, hence the higher price per tonne. The top four importers in 2014 were China (291Mt, worth around $20bn), India (223Mt, $13bn), Japan (187Mt, $16bn) and South Korea (123Mt, $9bn). After Asia, Europe is the largest importer. It collectively bought 260Mt, worth around $21bn. (This includes trade within Europe). An important caveat is that only a minority of coal production is traded internationally. The share is rising, up from 13% in 2000 to 17% in 2014. Still, most coal is used domestically, as the chart below shows. Falling trade volumes are bad news for exporters, but not automatically good news for the climate. You can see that, overall, production and exports of coal have plateaued since 2012. Global coal use fell in 2014, a trend that accelerated through 2015, according to estimates from the German Coal Importer Association (VDKi). Exports have matched this pattern. The International Energy Agency (IEA) says coal use could fall further by 2020, depending on what happens in China. However, coal use falls by two-thirds by 2040 in the IEA 2C scenario, designed to show how we could avoid dangerous climate change. This would leave nearly 90% of coal reserves in the ground. ESKOM ALSO RESPONSIBLE FOR ABOVE-INFLATION COAL HIKES (MiningMx, 6/5/2016) A proposal by the National Energy Regulator of South Africa (Nersa) to benchmark the price of coal Eskom buys from mining companies will add much needed transparency to the procurement process. There is a view out there, however, that Eskom has brought Nersa’s action upon itself. Nersa’s proposal is to adjust the multi-year price determination (MYPD) methodology that Eskom uses in order to justify increases in the annual electricity tariffs. In previous MYPDs, Eskom has claimed that above inflation increases for primary energy – mostly coal – has driven demands for similarly above inflation tariff hikes. Eskom gives an average cost of coal but Nersa is proposing that Eskom provide it with its primary energy costs on a power station by station basis. Currently, Eskom negotiations with mining firms are kept under lock and key, although knowledge of specific prices Eskom pays is still shared if you know where to ask for it. Whilst this will bring transparency to the MYPD process, and is a step away from indexation of the domestic coal market, it is a step that Eskom has largely created itself. This is because the mix of coal Eskom buys has changed significantly from about 2008 when almost all the coal it bought was through long-term contracts or from cost plus mines. However, Eskom has in the last seven to eight years found it increasingly difficult to invest in the expansions of the fixed cost mines that would provide replacement tonnes of low cost coal. As a result, it has sourced more coal from smaller suppliers who have no means of conveying the coal from mine to power station – as a fixed cost contract would include – so that deliveries are by road. Said an industry source: “You can add at least R150 per tonne to the cost of buying coal if you deliver by road”. About 30 million tonnes (mt) of Eskom’s total burn of 118mt is by this route today. It’s the decline in Eskom’s ability to pay for expansions that was behind the failure of Exxaro Resources to renew a coal supply agreement with Eskom from its Arnot mine to Arnot power station. Exxaro had asked Eskom to conduct a due diligence into developing a mine extension at Arnot that, once completed, would have resulted in the availability of cheap coal supply. Without the expansion, Exxaro required an increase to the coal contract in order to justify mining from old areas at Arnot. In the last two years, supply from established mines, including Arnot as well as Anglo’s New Denmark and Kriel mines and the Khutala operation of South32 have fallen about one million tonnes owing to under investment in new resources. There is one happy spin-off to this situation, however. Transparency in the setting of coal supply agreements would throw the spotlight on the cost of coal from Tegeta Exploration & Resources, a subsidiary of the Gupta family’s Oakbay Resources to Eskom. Tegeta’s R2.15bn acquisition of Optimum Coal Holdings, which was subject to

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business rescue proceedings, has attracted controversy because analysts can’t see how the Tegeta can run Optimum mine profitably when former owner of the mine, Glencore, could not. ANOTHER MOZAMBIQUE COAL RAILWAY PROJECT DEVELOPS, WHILE COUNTRY IS HIT BY DEBT SCANDAL (Mining Weekly, 6/5/2016) The international tender for the construction of a new railway to link Mozambique’s coalfields to the coast closed at the end of last week. The project is being developed by Thai Moçambique Logística, a joint venture between Thailand-based Italian Thai Development Company, which has a 60% share, local State-owned ports and railways company Portos e Caminhos de Ferro de Moçambique (better known as CFM), with a 20% stake, and local private-sector consortium Corredor do Desenvolvimento Integrado do Zambeze (Zambeze Integrated Development Corridor, generally known by the acronym Codiza), also with 20%. Seven companies are known to have submitted bids for the project. Two are from China, two from Turkey, and one each from Brazil, Portugal and South Korea. The aim of the project is to provide a third rail link from the coal-rich inland province of Tete, this one running to the part of Macuse, in Zambézia province. This will allow the future expansion of coal production in Tete. Originally, the Tete district of Moatize – currently the centre of the country’s predominantly metallurgical-coal mining industry – was connected to the coast by the Sena railway, which ran to the coastal city of Beira. Despite upgrades, this simply cannot fulfil the demands of the miners. Consequently, a second line, from Moatize through Malawi to the Mozambique coastal city of Nacala was developed (with a mixture of greenfield new construction and brownfield rehabilitation of existing track) by a consortium led by Brazilian mining group Vale (which developed and operates the Moatize mine). The new Macuse line will run for 480 km to 500 km, although talks are under way with the government to add another 120 km, which would serve coal deposits not yet connected or close to any railway. The project also helps with the problem of port congestion by adding a third harbour for the export of the energy mineral. Indeed, being capable of taking ships of up to 80 000 t, Macuse has greater capacity than Beira. Meanwhile, in a felicitous coincidence, the theme of the Fifth Mozambique Mines, Petroleum and Energy Conference was Utilising National Natural Resources to Catalyse the Development of Infrastructure, Inclusive Growth and Economic Transformation. It was held in Maputo on April 27 and 28 and was opened by Mineral Resources Minister Pedro Couto. In the mining section of the conference, one of the focuses was, unsurprisingly, on updates on the mining logistics and transport situation. Another one was the future of the country’s coal sector, in the light of international coal demand trends. Other important topics included the changing legal and financial framework for the country’s mining sector and environmental management. The development of local skills and a local equipment supplier base was another focus. GRAIN COTTON SOUTH AFRICA SEES 2015-16 HARVEST DECLINING ALMOST 50% (Moneyweb, 6/5/2016) South Africa will produce almost 50 percent less cotton this year than in the previous season after farmers switched to more profitable crops such as corn, according to Cotton South Africa. The nation will probably produce 48,262 bales of cotton in the 2015-16 season, including an estimated 600 bales from Swaziland, a tiny monarchy surrounded by South Africa, the industry body said in an e-mailed report on Thursday. Last year, the country saw the lowest amount of rainfall since records started in 1904, raising corn prices and prompting farmers to switch to more profitable crops. “Cotton competes with other summer crops like maize and sunflowers, so if the farmer feels he can get a better return on those other crops, then he would rather plant that,” Koot Louw, an official at Pretoria-based Cotton South Africa, said by phone. “Farmers planted less because of the drought.” Global cotton consumption is expected to decline 3 percent in 2016-17 because of weaker demand and low polyester prices, Cotton South Africa said, citing the International Cotton Advisory Committee. Global production could increase 4 percent in that period due to improved yields in India, the world’s largest producer. TRANSNET TRANSNET TE HANDS WAGONS OVER TO SWAZILAND RAIL (Engineering News, 6/5/2016) Transnet Engineering presented 25 fuel tanker wagons and 20 container wagons to Swaziland Railway in April. The wagons, which cost R35-million, were delivered ahead of schedule and formed part of an order for 90 wagons, with the remaining 45 to be delivered in May. Transnet Engineering CEO Thamsanqa Jiyane said that TE had fast-tracked the development of prototypes for the two wagon types. He added that TE engineers had extensive experience in rolling stock design, manufacturing and building, and together with dedicated workers on the floor, TE achieved the design of a brand new

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skeletal container wagon, operating on a dual braking system, as well as a fuel tanker wagon in line with Swaziland Railway’s requirements. He noted that it usually took around three months build one prototype wagon. In this instance, however, the manufacturing and design process was completed within two weeks, which enabled TE to go into mass production immediately after the prototype was approved Swazi Rail CEO Stephenson Ngubane said that Swaziland Railway had been worked with Transnet Engineering for a long time and found that the company was constantly improving. Jiyane further noted that TE was in the process of implementing its Transnet Africa Strategy, which was intended to integrate South Africa with the Southern African Development Community through the promotion of regional rail connectivity. CURRENCIES AND PRICES

JSE AS AT 17:00PM 5 MAY 2016

All Share Index

5/05 51,934 + 0.12%

Industrials Index

5/05 43,111 - 0.49%

Financials Index

5/05 40,596 - 1.02%

Top 40 Index

5/05 45,623 + 0.14%

Industrial 25 Index

5/05 69,729 - 0.08%

Financial 15 Index

5/05 14,653 - 1.26%

Resources 10 Index

5/05 30,850 + 2.13%

Alt-X Index

5/05 1,510 - 0.52%

WORLD INDICATORS

FOREX

Rand/Dollar 06:31 15.0134 + 0.29%

Rand/Pound 06:45 21.7011

+ 0.05%

Rand/Euro 06:45 17.1191 - 0.51%

COMMODITIES

Gold (usd/oz) 06:45 1,278.50 - 0.12%

Platinum (usd/oz) 06:45 1,063.00

+ 0.90%

Brent (usd/barrel) 06:27 44.67 + 0.11%

WORLD MARKETS

Wall St (DJIA) 5/05 17,661 + 0.05%

Germany (DAX) 5/05 9,852

- 0.75%

Japan (Nikkei) 06:26 16,015 - 0.82%

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3month

(Business Report, 6/5/2016)

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(TFR Commercial Management: Business Performance Dept)

Petrol/ Diesel Price

YR2016 06-Jan-16

03-Feb-16

02-Mar-16

06-Apr-16

04-May-16

01-Jun-16

06-Jul-16

03-Aug-16

07-Sep-16

05-Oct-16

02-Nov-16

07-Dec-16

COASTAL

95 LRP (c/l) 1194.00 1200.00 1131.00 1214.00

95 ULP (c/l) 1194.00 1200.00 1131.00 1214.00

Transnet Freight Rail News Briefs Page 8 of 9

Diesel 0.05% (c/l) 972.47 910.47 925.47 1015.47

Diesel 0.005% (c/l) 977.87 914.87 928.87 1020.87

Illuminating Paraffin (c/l) 594.028 535.028 552.028 608.028

Liquefied Petroleum Gas (c/kg)

1892.00 1893.00 1773.00 1883.00

GAUTENG

93 LRP (c/l) 1209.00 1215.00 1146.00 1232.00

93 ULP (c/l) 1209.00 1215.00 1146.00 1232.00

95 ULP (c/l) 1237.00 1243.00 1174.00 1262.00

Diesel 0.05% (c/l) 1005.17 943.17 958.17 1053.87

Diesel 0.005% (c/l) 1010.57 947.57 961.57 1059.27

Illuminating Paraffin (c/l) 647.028 588.028 605.028 662.628

Liquefied Petroleum Gas (c/kg)

2074.00 2075.00 1955.00 2065.00

YR2015

07-Jan-

15

04-Feb-

15

04-Mar-

15

01-Apr-

15

06-May-

15

03-Jun-

15

01-Jul-

15

05-Aug-

15

02-Sep-

15

07-Oct-

15

04-Nov-

15

02-Dec-

15

COASTAL

95 LRP (c/l) 1083.00 990.00 1086.00 1246.00 1246.00 1293.00 1334.00 1283.00 1214.00 1218.00 1196.00 1197,00

95 ULP (c/l) 1083.00 990.00 1086.00 1246.00 1246.00 1293.00 1334.00 1283.00 1214.00 1218.00 1196.00 1197,00

Diesel 0.05% (c/l) 997.49 895.49 969.49 1090.09 1085.09 1134.09 1138.09 1062.27 1008.27 1061.27 1052.27 1048,47

Diesel 0.005% (c/l) 1001.89 899.89 973.89 1096.49 1091.49 1137.49 1141.49 1067.67 1016.67 1067.67 1057.67 1055,87

Illuminating Paraffin (c/l) 697.728 595.728 668.728 690.828 685.828 727.828 733.828 663.828 608.828 658.828 656.828 657,028

Liquefied Petroleum Gas

(c/kg) 1829.00 1679.00 1833.00 1918.00 1935.00 2035.00 2091.00 2002.00 1887.00 1898.00 1851.00 1847,00

GAUTENG

93 LRP (c/l) 1102.00 1009.00 1105.00 1261.00 1261.00 1308.00 1352.00 1301.00 1232.00 1230.00 1208.00 1209,00

93 ULP (c/l) 1102.00 1009.00 1105.00 1261.00 1261.00 1308.00 1352.00 1301.00 1232.00 1230.00 1208.00 1209,00

95 ULP (c/l) 1124.00 1031.00 1127.00 1289.00 1289.00 1336.00 1377.00 1326.00 1257.00 1261.00 1239.00 1240,00

Diesel 0.05% (c/l) 1028.09 926.09 1000.09 1122.79 1117.79 1166.79 1170.79 1094.97 1040.97 1093.97 1084.97 1081,17

Diesel 0.005% (c/l) 1032.49 930.49 1004.49 1129.19 1124.19 1170.19 1174.19 1100.37 1049.37 1100.37 1090.37 1088,57

Illuminating Paraffin (c/l) 747.928 645.928 718.928 743.828 738.828 780.828 786.828 716.828 661.828 711.828 709.828 710,028

Liquefied Petroleum Gas

(c/kg) 2011.00 1861.00 2015.00 2100.00 2117.00 2217.00 2273.00 2184.00 2069.00 2080.00 2033.00 2029,00

(SAPIA online)

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