A CLOSER LOOK AT TAKE-OR-PAY AGREEMENTS
What’s all this hullabaloo recently about take-or-pay agreements between SA coal exporters and Transnet, the state-owned transport utility? What’s a take-or-pay agreement anyway?
In essence, Glencore is refusing to sign a freight and tariff [take-or-pay] agreement with Transnet for coal it will export from its collieries in Mpumalanga to Richards Bay in KwaZulu-Natal.
To put the business stakes in context, Glencore exported 23.4m tons of coal from its SA assets during its 2014 financial year, a 14% increase year-on-year, at an average price of $68 per ton. That’s equal to around R19.3bn in annual revenue.
The way take-or-pay agreements work is that coal producers undertake to pay Transnet a percentage of the tariff per ton if they fail to provide the coal. Transnet argues that an empty wagon is an unrecoverable cost, whereas coal producers will eventually receive revenue – even for coal that was late for the siding.
Transnet also argues that it needs to be compensated for the investment it has made on the railway, especially as it invests throughout the cycle as it is doing now when the economy is facing headwinds and capital for fixed investment is hard to come by.
Glencore counters, however, that the capital for the Mpumalanga-Richards Bay coal line has long been sunk. Glencore also won’t accept the other argument that Transnet has to take care of its credit rating since its credit is largely government guaranteed. Glencore says that take-or-pay agreements force it to put coal down the line even when it is unprofitable when, in fact, the coal could be supplied to Eskom, which analysts believe is facing a heavy coal supply deficit from about 2018.
And it’s not just a Glencore issue. Transnet has about 29 coal-exporting clients to which it will have to offer the same terms if amendments are made to a take-or-pay agreement with Glencore.
The spat serves to show that relations between Transnet and the private sector have been bubbling under for years.
Remember Brian Molefe, CEO of Transnet, recalling how one meeting with BHP Billiton’s SA coal business almost deteriorated into fisticuffs on the issue of tariffs, and additional claims by Transnet that BHP Billiton’s tariff agreement didn’t do enough to secure BEE? That issue, too, is not far from erupting again either. Commenting on the take-or-pay negotiations with Glencore, Transnet GM for group commercial Divyesh Kalan said that the Richards Bay Coal Terminal, the coal export terminal in which Glencore, BHP Billiton and Anglo American are the major shareholders, failed to provide stockpiles for certain types of coals that junior mining companies mine.
As a result, junior miners are forced to sell their coal to traders, such as Glencore, in order to secure some access to the export markets, and assuming they are unable to get export entitlement at other terminals, Kalan said.