The African economy moves at on average, 30km/h by rail, and 80km/h by road. It starts on the far end of the value chain where raw materials are extracted in the primary sector and transported to places where they will be processed.
Every additional effort to add value to a piece of timber, or a few tons of copper, requires industries, labour and transport businesses and infrastructure.
As the value of the product increases, of course, it becomes more and more time sensitive because the customers increase in number and urgency. Eventually, the consumer wants the product now, in store or online. Each step of this process is at 30 to 80 kilometres per hour on land, this long read attempts to outline the key issues in the market.
Freight market conditions
While metals, stone and minerals increasingly dominated our export base since the 90’s, our productive outputs in gold and copper have declined consistently along the same timeline. Nickel, coal, manganese, iron ore outputs have been growing, at a rate slower than the minerals that dipped.
Given the primary sector base in our economy, we see it dominating economic growth, and macroeconomic indicators in the Quarterly Bulletin. We also see mining and quarrying dominating the freight transport market in terms of payloads.
However, our capacity to add value to these primary sector outputs has been inhibited so significantly that SA has become a net importer internationally. Even worse, it has secured much less trade with regional counter-parts.
Accounting for 0.6% of global trade commodities in 2018, exports from Sub-Saharan Africa were $330bn, only $34bn was intra-regional, according to Chatham House. SA exports were worth $8.5bn to Sub-Saharan Africa—up to Kenya, while it imported $9.7bn from countries as far as Nigeria (accounting for $3.9bn).
Intra-regional trade varies from country to country, but for SA, in some countries it is exporting more than it imports, feeding ground for unfavourable trade dynamics.
Time to import and export combined varies between less than 30 hours in Botswana and nearly 500 hours in Zimbabwe, South Africa is nearly at the 300-hour mark. Whereas, compliance also comes at a cost at the border and documents. This according to the World Bank Doing Business Report for 2019, reveals a complex and expensive scenario for full trucks to leave South Africa, and return with full loads, where trade is balanced.
The situation is so severe that the Industrial Policy Action Plan 19/20 contended that South African companies need to start building mutually beneficial value chains within the regional market. That means, to stop “dumping” goods, and enable industries that can substitute imports in order to balance trade between SA and our continental neighbours.
While retail ticks up during the pandemic, both manufacturing and freight transport indicators reveal a gradual recovery from over the -40% year-on-year dip in April, to a smaller y/y contraction by September 2020.
Operational and diversified logistics
These are good signs, but they remind me of a time when the freight market was doing well: the demand for road freight operations was so high, margins were getting tighter in general freight segments with easy entrance. So much so, that the recorded returns from StatsSA were showing significant saturation of lower returns per ton.
One can only imagine what it means for the road freight operators in the Small Medium end of the spectrum: much tighter margins between those who have the Letters of Intent, and those tasked with securing horses, trailers and a driver.
The less established operator will most probably opt to secure the cheapest of every input, including fuel, given that this could take up 60% or more of the total cost of operations.
For more established firms, reports of increased returns from freight operations are not too surprising since various markets have opened new niches that diligent and timely firms have secured.
Barloworld’s interim results till March 2020, already showed a difficult landscape on the logistics front, -4% dip in the return on capital, revenue down by 28% from R2.9bn to R2.1bn and R30m operating loss. Interestingly, they already geared the company up to pursue a longer-term contract retention approach, while reducing their fixed cost base—which included reducing employee costs. The results do reflect the early onset of lockdown, and its unpredictable nature, certainly their full results would provide better insights.
KAP’s Unitrans report a 40% increase in operating profits before capital items, and net operating assets up by 20% for contractual logistics in South Africa, while the company reports a revenue dip by 13% and EBITDA decline of 27% by year end 30 June. The underlying strategy here seems to rely on already established contracts, new opportunities and efforts to justify the investment in fleet and technology.
Bidvest presents a different package of results largely due to its more diversified logistics profile in logistics infrastructure, operations and services with year-ending on 30 June. Revenue dipped by 5.8%, to R6.3bn, operating profit down by 16.3% and EBITDA down by 17%. Due their high exposure to port operations, global lockdowns rippled into the business model, however each sub-division will represent different levels of performance with a good outlook for mineral, and agriculture markets. Furthermore, increased capacity and offering in the Liquid Petroleum Gas (LPG) facility will certainly underpin a new source of revenue.
With a year-ending on the 31st December 2020, it is difficult to say how Grinrod freight is fairing given its broad regional and multi-modal, multi-service strategy. However, last year it presented in 12% increase in revenue, 18% in operating profit. In the interim, they present a 10% up in trading profit against a 5% dip in revenues to R1.7bn—operations bringing just over half-a-billion compared to last year’s R363m.
Ports and terminals division leaned into finalising its master plan, long-term contract retention and increasing asset utilisation. This bolsters the 43% EBITDA in ports and terminals. From a logistics perspective, a focus on regional operations and improved utilisation of their fleet is expected. Hence the merger with African Rail Solutions would enable greater market positioning and enhance the EBIDTA above the current 29%. Overall, they are poised to focus on bring more volumes to their port operations at regional level in order to better utilise the 15-million-ton capacity, and 70 strong rail fleet.
While this is not the total freight picture in SA, or Africa, there is a clear indication that firms oriented toward operations have divergent results. This will reflect the commodities they transport, networks and other factors. Whereas, diversified logistics companies show hyper-mixed results and greater exposure to lockdown and market risks—but are bolstered toward resilient business operations.
Truck violence and labour issues
With these overall positive results at market level, the resurgence of near normal business, post-September 2020, coincides with even more tensions within the underbelly of the road freight market. Not the giants mentioned above.
For regional trade, every border crossing requires certain documentation to be cleared manually. That’s a few days. From there are fees related to regional trade, they vary by country, import and export flows. Along the journey, the driver needs to make specific stops to rest and refuel the vehicle.
COVID19 made the situation much worse with multiple screenings and practices that were even harmful toward drivers—all of which increased the border crossing times, and extended the duration of the journey.
However, as the market picks up, the broad array of operators, forwarders, consolidators and other players in the regional market, margins may have started to narrow. Worse: reducing costs and pushing for efficiencies by lean firms toward reducing the staff footprint into 2021 depending on market conditions.
The same old issues initially raised by the All Truck Drivers Foundation (ATDF) around the need to regulate the labour market of drivers in SA such that there is a quota for domestic drivers. However, their proposals also included paying a fee for every driver recruited from them.
One would expect the National Bargaining Council for the Road Freight and Logistics Industry (NBCRFL) to intervene as it did in July 2020 to prevent any form of protest taking place through an interdict, but it could not as no organisation has pinned itself as responsible. The labour issues within the industry are reflected in the emergence of various driver associations and structures aimed specifically at facilitating and representing truck driver interests in South Africa.
Hence the statistic that 44 021 truck drivers are South African and 6 756 are not should be taken within a pinch of salt: they are within the jurisdiction of the NBCRFL. Suggesting that the plight may lay well below the radar of formal firms faced with dynamic logistics environments mentioned above.
Under the NBCRFL, wages and other requirements are regulated and drivers are also protected, but where the freight market is picking up, operating along the fringes might make it easier to secure better margins from the contracts available.
The biggest challenge here is the regional trade implications of the violence, as truck drivers move throughout the continent—foreign drivers may retaliate. Impacting more broadly on the risk of human life and the South African economy, in addition to brewing a geopolitical scenario requiring urgent reforms.
Clearly, legitimate operators who formally report on their driver profiles, financial statements and other indicators are exposed to greater risks while companies which are outside of the “formal” terrain seem to remain hidden from full view.
This scenario exposes a significant caveat in the freight free market economy, one where market failures leave human lives hanging in the balance. Perhaps another task team will be established to ‘resolve’ this issue? Then again, the tensions could cool off as protesters need to return to their day-to-day businesses. We could ‘condemn’ the actions as frequently as they occur, but that does not prevent them from becoming an unfortunately recurring event.
The impacts are quite serious, if it escalates into the Southern African Development Community, as it could turn into an investment risk for logistics ventures under consideration. It would also ripple into the public perception, reviving the xenophobic narrative around SA.
Meanwhile, with the unemployment rate and general economic conditions, there is very little reason not to intervene more systematically than before: perhaps the road freight industry is primed for additional regulation. Perhaps it is time the net closed on the fringes.
 World Bank (2019). ‘Doing Business Report’. World Bank Group. [charts and estimation by authors]
This article was originally published on Fin24, “Freight and the bloody trucking labour market” on the 30th November 2020.