Analysis - Poor railways, ports put brake on Mozambique's coal rush
DONDO, Mozambique (Reuters) - Mozambique's transport system offers a cautionary tale to African mining ventures, as investors play poker with the government over fixing links that remain shambolic two decades after its civil war.
Foreign mining companies are betting in Mozambique on one of the world's largest untapped reserves of premium hard coking coal relatively close to Africa's east coast, a prime location for feeding hungry markets in Asia.
But they have run into a problem facing many minerals exporters across Africa. "If you can't take those goods to the market, you are wasting your time," said Sipho Nkosi, CEO of South African coal producer Exxaro, explaining the difficulties experienced by many such projects on the continent.
Tens of millions of dollars have poured into the only rail link between Mozambique's remote coal fields and the port of Beira, its export gateway. But despite the upgrades, heavy rains flooded parts of the Sena line in February, paralysing exports.
Brazil's Vale declared "force majeure" on coal shipments due to the two-week shutdown, invoking clauses in supply contracts covering disruptions beyond its control. A mine run by the Anglo-Australian Rio Tinto group also ground to a halt, leaving rows of empty railway wagons at Dondo, about 20 km (12 miles) from Beira.
About $20 billion (13 billion pounds) is needed to revive Mozambique's railways and ports, industry leaders estimate, a massive cost for a country the United Nations lists as the third poorest on earth.
While Vale is spending heavily on a separate line to the northern coast, rail investments have generally fallen short of needs so far. A concession deal to bring the Sena line back into full operation fell short of expectations and infrastructure development is generally slow, lagging the coal mining bonanza.
Mozambique's government insists that any infrastructure development projects also serve other uses such as non-coal cargo, shipments from neighbouring states and passengers.
"We are not building infrastructure just for coal," Transport Minister Paulo Zucula told Reuters.
Much is at stake for the former Portuguese colony where the average annual per capita income is just over $400. The government is counting on mining and new transport routes to boost economic growth and create jobs, in coal and elsewhere.
Rio Tinto's January announcement of a $3 billion write-down on the value of its Mozambican assets, partly due to problems of getting coal to port, was a wake-up call to the mining firms and the government. They worry that buyers of coking coal may turn to other markets if Mozambican supply is held up.
With coking coal markets over-supplied due to lower demand from steel mills and higher domestic production in China, the delays may favour the mining firms in the short term. They hope prices will have recovered to highs hit in 2011 by the time they can export Mozambican coal in greater quantities.
A Japanese steelmaker, asking not to be named, said the delays were part of the price his firm was willing to pay for the high-quality Mozambican coal. Mills in India, a target market for Mozambique, have said they expect coal from there to be available by the time global supply tightens again.
But as in Guinea, Democratic Republic of Congo and Africa's biggest economy, South Africa, the same question hangs over Mozambique's need to link its mines to its ports: who will invest the billions of dollars needed for railways and terminals and who will control them once they are running?
At one stage the government asked mining companies to commit themselves contractually to specific planned shipments so it could use this to obtain the billions of dollars of financing needed for infrastructure. Many firms declined.
Investors are sceptical too about Mozambique's promise that it will be able to move up to 120 million tonnes of coal per year - a sixth of the global steel industry's demand - by 2020.
"This is an annoying poker game in which every side wants the other to do something without committing," said Joseph Hanlon, a senior lecturer at Britain's Open University and an expert on Mozambique.
When Vale and others arrived in 2004, the Sena railway had not run for over a decade. Uprooted at various points by rebels during the 1975-1992 civil war, parts of it lay twisted and ruined, trees sprouting between the tracks.
The job of repairing the 600 km (375 mile) line, backed by a $110 million World Bank loan, was given to a consortium of two Indian firms and Mozambique's national logistics group CFM.
In 2011, the Mozambican state took the concession from the Indian firms when they failed to deliver after many delays and gave control to CFM. The firms called this "economic terrorism" and plan to take the government to court.
The World Bank said in a report last year that the line, "while operational, was delivered two years late and requires significant further work to be able to carry the current traffic safely and sustainably". It assessed the rehabilitation project as "unsatisfactory".
Nearly a decade after the World Bank loan, the Sena line carried only around 3 million tonnes of coal last year, less than half of what was projected.
Some sections are in a better state, but trains run at a snail's pace and drivers have to change points manually.
Relying on roads is too expensive, with the narrow highway between the mines in Tete province and Beira congested with trucks. The bottlenecks extend to ports: constant silting and shifting sandbanks require daily dredging at Beira, making it difficult for large vessels to pass.
With a gross domestic product of just under $13 billion, Mozambique says the private sector must find the billions required to fund infrastructure development. But recent drops in coal prices are making financiers cautious.
"You have less value for minerals, less capital, which is compounded by the lack of decisions regarding the completion of the infrastructure to get the coal out," said Stephan Morais, deputy CEO at Mozambican investment bank BNI.
Eurasia Group Africa analyst Mark Rosenberg said not only did CFM suffer from its own management problems, but the entity was "a channel for the political and commercial interests of President (Armando) Guebuza and senior members of the ruling Frelimo party, introducing further inefficiencies".
Guebuza's nephew is on CFM's board and the family is a shareholder in Cornelder de Mocambique, which manages Beira port. Guebuza ally Celso Correia heads investment group Insitec, which sold a concession on the Nacala rail line to Vale.
CFM spokesman Alves Cumbe declined to respond to Rosenberg's allegations. "I will speak about the railway lines, but about third party interests, I have no comment," he said. No one was immediately available to comment at the presidency.
Rio Tinto, whose initial plan to carry coal by barge down the Zambezi river was rejected on environmental grounds, irritated the government by insisting on a self-owned and self-operated railway.
"They wanted an exclusive line, just for Rio Tinto," Zucula said. "Mozambique doesn't work on those principles."
Rio Tinto declined to comment on its discussions with the government. It is now among six preferred bidders for a new $3 billion multi-user railway and port development project, while Vale is ploughing $4.4 billion into revamping and extending an open-access railway line and a deep-water port at Nacala.
CFM says it will soon set up an independent operator to manage the various rail lines, while rates and access will be administered by a state regulator.
"We adopt the same attitude appropriate in looking for a spouse: it pays to be active, interested and open-minded, but it does not pay to be in a hurry," said CFM's head Rosario Mualeia, quoting billionaire U.S. investor Warren Buffet.
(Additional reporting by James Topham in Tokyo; Editing by Pascal Fletcher and David Stamp)
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