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)

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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

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Thank You …

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Andrew ShawAssociate Director