Macrologistics supply chains in South Africa


Written by: J.H. Havenga, A. de Bod, Z.P. Simpson, S. Swarts, and I.E. Witthöft, February 2022, GAIN Group

Introduction

Macrologistics refers to the strategic management of a country’s supply chains to support the attainment of macroeconomic goals. These goals frequently focus on supply chain cost reductions to increase the competitiveness of industries, but could also include, amongst others, guiding spatial development, creation of local beneficiation clusters and upliftment of rural economies. The macrologistics prerequisite for informing the inherent trade-offs underlying these macroeconomic goals is the estimation of granular freight flows based on an understanding of disaggregated commodity-level volumetric supply (origins) and demand (destinations) in the economy. (Supply refers to production and imports, while demand is the aggregate of intermediate domestic demand, final domestic demand and exports). Granular freight flows enable detailed segmentation coding to inform spatial, modal and sectoral strategies from ‘first principles’ – i.e. strategies embedded in data that can be interrogated for validity, refinement, targeting, and planning.

The results of such a freight-flow model for South Africa indicated that surface freight transport volumes (i.e. road and rail) amounted to 865 million tonnes in 2019 – i.e. to facilitate the interaction between supply and demand in the economy, origin-destination pairs for 865 million tonnes of freight are created (refer Figure 1 for a geographical depiction of these flows). However, actual shipment volumes exceed supply and demand volumes because of the nature of value and supply chains. The use of consolidation and distribution centres, common-use facilities and other requirements in supply chains could all cause multiple shipments for a single supply-and-demand pair. In South Africa’s case, this resulted in 1 635 million tonnes shipped in 2019, i.e. on average, each freight tonne is shipped nearly twice (1.89 times).  

Fig 1

Figure 1:  All South African freight flows (road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

This average however obscures the fact that large volumes of bulk export minerals and domestic mining minerals (totalling 421 million tonnes in 2019) are mostly shipped only once, and coal produced for mine-mouthed power stations (totalling 108 million tonnes in 2019) are not shipped at all. This implies that the remaining cargo, mainly comprising intermediate and final manufactured commodities, currently require complex supply chain solutions with many shipments between supply and demand points facilitated by an array of logistics facilities. One of the goals of macrologistics management is to define and quantify these macrologistics supply chains to identify potential opportunities for improvement. A high-level summary of these outputs is provided in this document.

Macrologistics supply chain segmentation

Distinct macrologistics supply chains are derived from the economy’s basic value chain and its related logistics requirements, as illustrated in Figure 2.

 

Fig 2

Figure 2:  The macroeconomic value chain and derived logistics requirements (Havenga, 2012:7)

 

Freight flows take place from the place of extraction or manufacturing to the place of utilisation or consumption. Volumes are skewed towards the extraction stages of value chains, and costs towards the consumption stages. Figure 3 illustrates the volume and cost distribution between the two extraction sectors of the economy (mining and agriculture), semi-beneficiated products and final products ready for consumption.

 

Fig 3

Figure 3:  Volume and logistics cost distribution for South Africa’s macrologistics supply chains based on 2019 data from the FDM™ (Havenga, de Bod, Simpson, Swarts & Witthöft, 2021:18)

 

The extraction stages of value chains require bulk handling facilities and large volume transport solutions that cost less per ton relative to solutions for higher-value commodities.  However, due to the lower value of mining and agricultural commodities, transport and logistics add relatively more value, i.e. contributing a larger portion of the delivered cost of commodities. (The transport cost of one ton of coal is significantly less than the transport cost of a one-ton car, but the transport cost portion of the delivered cost of one ton of coal is significantly higher). This phenomenon has an important effect on how these supply chains develop. Cost pressures in extraction supply chains are high, but so are volumes; high-volume solutions that drive cost down are attractive. In the ultimate case, for very simple bulk solutions, like the conveyor-belt type flows of commodities from a mine to an export port, such as for coal, iron ore or manganese, logistics costs can be relatively low, but cost pressures very high. In general, most of these supply chains are relatively straightforward and it is often possible to complete the supply-and-demand pair with a single solution and mode.

Volumes decline towards the beneficiation and consumption stages of value chains, yet matching supply and demand pairs often require more complex solutions involving many different shipments. Service providers along this chain can be either a creator of a complete chain or compete to be inserted as a contributor to this chain. Where a total chain is created (such as with a 3PL) by what could be called a “channel captain”, the creator can subcontract portions of this chain to 2PL’s.

The supply chain view could take various perspectives. It could be a modal view where, for instance, the same supply-and-demand pair requires a first-mile leg, long haul and a last-mile leg utilising different modes for the various legs. Road and rail are common in South Africa for domestic freight, but in some countries, this could include waterway and coastal shipping. (Some coastal shipping in South Africa does take place, as well as flows where the long-haul portion of the supply-and-demand pair is in pipelines). The supply chains can also be company-specific where large portions of the chain are occupied by a single business, such as Sasol, which holds positions in extraction, conversion, manufacturing and even retailing in energy and chemical supply chains. Supply chains can also be industry-specific where industry associations or loose combinations of industry players organise these supply chains.

The basic macroeconomic value chain depicted in Figure 2 gives rise to five distinct supply chains in the South African context:

  1. Large-volume export mining flows: Exports of coal, iron ore and manganese.
  2. Domestic mining flows: Movement of local minerals to domestic beneficiation centres.
  3. Beneficiation (intermediate manufacturing) flows (siding-to-siding for rail, or dedicated road-handling facilities at different plants): Flow of semi-beneficiated commodities between intermediate and final processing facilities.
  4. Consumption value chains: The flow of FMCG commodities of higher value between manufacturing facilities, distribution centres and retailers.
  5. Rural extraction and delivery: The flow of agricultural bulk from rural areas and delivery of consumer goods to these areas

In the next section, a summary of the salient characteristics, logistics costs and improvement opportunities of each macrologistics supply chain is provided. Macrologistics costs are comprised of transport costs, storage, handling and road distribution costs (last-mile). It is important to note that for the purposes of this document, only the logistics costs components for road is provided, except for bulk export commodities.

 

Characteristics of South Africa’s overarching macrologistics supply chains

As mentioned, South Africa’s supply and demand pairs total 865 million tonnes, comprising 83 million tonnes agriculture, 551 million tonnes mining and 231 million tonnes manufacturing.

 

Large volume export mining supply chains

South Africa’s volumetric freight flows are dominated by three export mining commodities, namely coal, iron ore and manganese, amounting to 156 million tonnes (i.e. 18% of total supply and demand pairs and 88% of the total export mining flows of 178 million tonnes). Export coal and iron ore use dedicated “conveyor belt” type rail lines with dedicated sidings and dedicated loading-offloading equipment (most export coal uses the coal line between Ermelo and Richards Bay and export iron ore the iron ore line between Sishen and Saldanha). The use of the rail mode is only limited by available capacity; in fact, customers match volumes to rail capacity to avoid additional supply chain costs to maintain the competitiveness of these primary commodities on global markets. Manganese flows are typically on the general freight rail network between Kuruman and the dedicated terminal in Port Elizabeth. However, due to the higher market value of manganese, road transport is utilised when rail capacity is insufficient, and other rail routes to export ports have also been developed, such as utilizing the iron ore export line and developing a road and rail route to Luderitz in Namibia. Large volume export commodity flows are depicted in Figure 4.

 

Fig 4

Figure 4: Large volume export commodity flows in South Africa (i.e. coal, iron and manganese; road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

Other export mining commodities often behave similarly to manganese with a mixed modal split favouring rail where capacity is available to facilitate the lowest cost logistics solutions. In some instances, such as for the 13 million tonnes of chrome exports in 2019, mines jointly own and operate common-use facilities, resulting in a first-mile move from the various mines to the common-use facility. Some logistics solutions consider this, and rail, though dominant, now have to consider that an additional transfer is necessary and plan for this. Other export mining commodity flows in South Africa is depicted in Figure 5.

 

Fig 5

Figure 5: Other export mining commodity flows in South Africa (road freight in red and rail freight in blue – note: the rail fright depicted on the coal line here is not export coal) based on 2019 data from the FDM™

 

Within large volume export mining supply chains, the logistics costs component differential between the dominant bulk export commodities and smaller mining commodities with slightly more complex flows is already evident. For the dominant export mining commodities of coal, iron ore and manganese, transport costs typically comprise almost 100% of logistics costs and focusing on providing and maintaining adequate conveyor-belt type infrastructure is the key logistics requirement. For the bulk other mining exports on NatCor (which represent the majority of other export mining flows on road) 2019 road logistics costs are distributed between transport (75%), handling (13%), storage (8%) and last mile (4%), highlighting that the management of other logistics cost components require more attention.

 

Domestic mining supply chains

Rail’s competency in the movement of domestic mining commodities to beneficiation centres is relatively well-established, especially in the domestic coal and manganese segment. The challenge is that these flows do not follow typical freight corridors, but often rural routes, e.g. iron ore from Sishen to Newcastle, manganese from Kuruman to VanderBijl, or coal from coal mines to power stations. This freight is clearly rail economical (see textbox) and it is challenging for road infrastructure in rural areas to entertain a large number of heavy road vehicles. Rail capacity failures in this regard should therefore be of concern. The rail gap in the transport of domestic mining is mostly around the coalfields, although there are also sizeable amounts of coal on the N1 and some manganese flows that require attention.

 New Textbox

 

Manganese is a high-value commodity, therefore less cost-sensitive than coal and iron ore and shifts to road even more easily during rail capacity challenges. Figure 7 illustrates domestic mining commodity flows in South Africa.

 

Fig 6

Figure 7:  Domestic mining commodity flows in South Africa (road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

The first portion of this supply chain is the same as for export mining (dedicated sidings with some common use facilities), but these supply chains usually end up at a production siding or road receiving facility. As an example of the cost structure for domestic mining bulk, on NatCor the 2019 road logistics costs are distributed between transport (69%), handling (10%), storage (8%) and last mile (13%).

 

Agricultural supply chains

Agricultural supply chains are similar to that of domestic mining with dedicated sidings, but common-use facilities, such as silos are often utilised.

As an example, beef production in South Africa has become more vertically integrated as many large commercial feedlots also own their own abattoirs. These feedlots also sell directly to consumers at their own retail locations.  Abattoirs are also expanding downwards in the value chain and starting to enter the wholesale market.[1] In the milk segment, farmers store milk in cooling tanks until it is bought by a milk buyer and transported to their processing facility[2].

In contrast, most grain farmers do not have their own on-site storage facility. This is mostly due to needing the revenue from the current year’s harvest to prepare for the next year’s crop. They, therefore, store their commodities in commercial grain silos of which the large majority (95%) are on the rail network, as can be seen in Figure 8. Due to changes in the grain commodity landscape, more grain processors are willing to buy directly from farmers which could see an increase in on-farm storage in the coming years.

[1] A Profile of the South African Beef Market Value chain 2019, Department: Agriculture, Forestry and Fisheries

[2] The Milk SA guide to dairy farming in South Africa, 2nd edition, Milk SA

 

Fig 7 

Figure 8: Map of grain silos in South Africa (Created by the authors)

 

Agricultural or rural freight typically exhibit low-density flows and dispersed collection points, making rail economics more challenging. Figure 9 illustrates all agricultural flows. However, once consolidated at e.g., silos, and provided there are sufficient volumes, the same approach as with domestic minerals can be followed. Rail-friendly characteristics are also improved if the cargo has to be moved over long distances to production centres and begin to follow corridors. A sizeable portion of this freight could therefore potentially be classified as rail-friendly and a road-to-rail strategy must also consider service offerings here to support the development of rural economies.

 

Fig 9

Figure 9: Agricultural flows in South Africa (road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

For domestic agricultural bulk supply chains, transport currently remains the major road logistics costs component (the majority of this segment is on road). Compared to domestic mining, however, the shift in road logistics costs towards the last mile is evident (2019 data):

  • The Cape Town corridor – Transport 67%, handling 5%, storage 5% and last mile 23%;
  • The Natal corridor – Transport 63%, handling 8%, storage 8% and last mile 21%.

 

Beneficiation supply chains

Beneficiation or intermediate manufacturing flows refer to large industrial value chains where an intermediate step is required before a final product is manufactured (refer to Figure 10). These flows follow corridors much more than mining and agricultural flows, and mostly use dedicated sidings or road receiving/dispatching facilities, sometimes with common-use facilities. An example is the manufacturing of steel coils at Mittal Steel Vanderbijl that is subsequently shipped to Volkswagen for car manufacturing. Usually, the two centra (in this case Mittal and Volkswagen) should have rail sidings and can easily be connected by a rail service. With large consignments (as is often the case), block trains or at least rakes can economically be used, with smaller wagon loads these wagons have to be collected from sidings in an area, taken to a shunting yard, built into a train and follow the same process on the other side, which is obviously less economical. However, once again, large volumes of the same commodities over long distances can here be defined as rail-friendly. A revitalisation of industrial sidings, and the re-insertion of rail in industrial value chains, is a critical component of any road-to-rail strategy.

 

Fig 10

Figure 10: Beneficiation flows in South Africa (road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

In 2019, road logistics costs for domestic heavy break bulk on the various corridors were as follows:

  • NatCor: transport 56%, handling 13%, storage 13% and last mile 17%.
  • CapeCor: transport 58%, handling 10%, storage 10% and last mile 22%.
  • SouthCor: transport 56%, handling 10%, storage 10% and last mile 23%.

If dedicated supply chains can be developed where commodities can be transported from a rail siding or a dedicated road transport facility from the initial point of beneficiation to the point of final intermediate input, i.e. without the need for redistribution or a last-mile leg, logistics costs can be reduced.

 

Consumption supply chains

Large volumes of finished palletised commodities (in South Africa mostly packaged food with some textiles, toiletries, pharmaceuticals and beverages) are moved between distribution centres on a core network connecting three predominant centra, Gauteng, Cape Town and Durban, and several other large peripheral centra such as Port Elizabeth, East London, Bloemfontein, Kimberley and Nelspruit. This freight is higher in value, follows main commercial corridors such as the N1 and N3, and is often transported over long distances on road, frequently in a pallet-friendly curtain-side interlink (refer to Figure 11).

 

Fig 11

Figure 11: Consumption flows in South Africa (road freight in red and rail freight in blue) based on 2019 data from the FDM™

 

Road line haul costs remain the largest cost contributor for both light break bulk and palletised goods on the two major domestic freight corridors (refer to Table 1).

 

Table 1: Road cost components for consumption value chains on South Africa’s two main general freight corridors based on 2019 data from the FDM™

ROAD COST COMPONENTS

Transport

Handling

Storage

Last mile

Domestic light break bulk

Capecor

65%

6%

6%

22%

Natcor

57%

11%

11%

20%

Domestic palletised

Capecor

56%

10%

10%

24%

NatCor

46%

17%

17%

19%

 

In contrast to beneficiation chains (such as intermediate inputs into automotive manufacturing, where more specialised equipment is required for loading and offloading), manufactured goods can be unitised and more standardised handling is possible. In these chains however feeder and distribution services will always be required. In the case of South Africa, the line haul cost is the core element where significant cost reduction opportunities can be engineered through domestic intermodal solutions. A modal shift objective, where road long-haul is replaced by rail, should consider the total supply chain, including the terminals, links, consolidation and distribution functions, the unitisation of freight and more complex commercial arrangements. It is not as simple as only providing a rail solution in isolation.

In South Africa, rail however does not have a service offering for palletised long-distance freight despite this freight complying with all the aspects of rail economics i.e.:

  • It is unitised onto pallets and can be easily unitised into pallet-friendly containers making the resulting ‘commodity’ uniform;
  • It follows highly densified routes; and
  • It has dense origin and destination points.

(also refer to the textbox earlier in the document).

In the developed world this type of freight is often transported via rail between distribution centres, with the first and last mile on road. A domestic intermodal solution must be developed for this freight in South Africa – typically rail for long, dense flows, with road providing feeder services at both ends (refer to Figure 12).

 

Fig 12

Figure 12: Freight consolidation opportunities enabled by domestic intermodal solutions (Simpson, De Bod, Havenga, Van Dyk & Meyer, 2021:194)

Conclusion

Transport costs as a percentage of road logistics costs decline as supply chains become more complex. Consider the example of the Natal Corridor (refer to Table 2).

 

Table 2: Natal corridor road logistics cost distribution based on 2019 data from the FDM™

 

Linehaul

Storage

Handling

Distribution

Export mining (excluding export lines)

75%

8%

13%

4%

Domestic mining

69%

8%

10%

13%

Agriculture

63%

8%

8%

21%

Beneficiation

56%

13%

13%

17%

Consumption - light break bulk

57%

11%

11%

20%

Consumption - palletised

46%

17%

17%

19%

 

Within beneficiation and consumption supply chains, transport costs are still important but transporters must consider their effect on other supply chain elements which become increasingly important. As an example, when modal shift is considered, rail line haul does not only compete with road line haul but also has to consider the fact that the rail mode will have significant impacts on storage, handling and distribution. For instance, storage costs and handling costs might be negatively impacted. This impact could be negated by lower rail transport costs, but also more seamless and effective transfer between rail, storage and distribution.

This analysis emphasises the importance of a nuanced macrologistics approach informed by detailed market segmentation based on inter alia supply chain types and modes.

 

References

Havenga, J.H., 2012. Rail renaissance based on strategic market segmentation principles. Southern African Business Review, 16(1):1-21.

 

Havenga, J.H., de Bod, A., Simpson, Z.P., Swarts, S. & Witthöft, I.E. 2021. A proposed freight and passenger road-to-rail strategy for South Africa. [Helsinki]: UNU-WIDER

 

Simpson, Z., De Bod, A., Havenga, J., Van Dyk, E. & Meyer, I. 2021. Intermodal solutions for the South African fast-moving consumer goods sector. World Review of Intermodal Transportation Research, 10(3):179–201.