Business Watch: Spoonful of sugar helps as property loses appeal

A few years ago, when the sugar price was in the doldrums and the property market was ablaze, Tongaat Hulett, with its successful strategy of turning cane land into swanky property developments, was considered a far more interesting bet than stodgy old Illovo with its sugar cane farms.

But it seems that Illovo's singular focus is set to pay off. As Africa's largest sugar producer, it is now better positioned to take advantage of reforms in the EU that, since October last year, allow preferential exports from developing countries.

Tongaat is still doing well, as its recent results show, but Illovo is better positioned to take advantage of the fact that sugar is now rather sexy, helped along, of course, by a strong sugar price. On the other hand, property is not, sexy that is.

The scope of what was a boom and then a bust in the property market can be illustrated by the gains Tongaat Hulett made on this business between 2003 and 2007.

Formerly known as Moreland and now Tongaat Hulett Developments, this business just kept making more and more dosh, taking its operating profit from R92 million in the year to December 2003 to R428m in the year to December 2007, when it outperformed the group's sugar business.

But last year the group's property business slimmed down its contribution to operating profit, bringing in R148m.

So, the tide seems to have turned in Illovo's favour, for now. But no doubt Tongaat's day will come again; after all, it still owns some of the best coastal real estate around, and with gains being made in its Zimbabwean sugar business, its future is also rather bright.

Karoo gas

In results released this week, petrochemicals producer Sasol let on that it has applied to explore for shale gas in the Karoo.

The joint application with Norwegian utility Statoil and US natural gas producer Chesapeake Energy is expected to take about a year to process.

Chief executive Pat Davies told Engineering News that a new technology being developed in the US had enabled the extraction of gas from shale, which was previously not economic.

"If there is shale gas in the Karoo, and if it's economically extractable, that will provide opportunities to supply gas into our own facilities or to sell it to others. It's a great business opportunity, but a long-term one," he said.

The potential venture is being touted as a low-carbon feedstock for Sasol, presumably because natural gas produces about half the carbon dioxide emitted by coal, and about a third less than oil. In some quarters, it is seen as a transition between petroleum fuels and renewable energy.

In fact, executives of Chesapeake have in the past touted the benefits of natural gas, by saying it leaves a small environmental footprint.

But there are growing concerns about the environmental impact of techniques to exploit shale oil and gas.

In particular, hydraulic fracturing, which pumps a high-pressure mixture of water, sand and chemicals to crack shale formations and free natural gas deposits, has been linked to contamination of drinking water, and there are questions about how the polluted water is disposed of.

In addition, some estimates suggest that each shale gas well requires 17 megalitres (a single site can contain many wells) of water. In the water-challenged Karoo, this may require a fleet of trucks to transport the water to drilling sites.

Transnet

South Africans will pay an additional 4c a litre for fuel by the end of 2012 when Transnet's new multiproduct pipeline will be fully commissioned.

This is because the pipeline between Durban and Johannesburg will now cost R15.4 billion, R2.7bn more than estimated last year.

This week, Transnet gave a number of reasons that had led to the increase, including rising steel prices, beefed up security, generators for back-up power and the recession. The state-owned enterprise said the cost for expediting the schedule had also had a bearing on the hike.

The 70 percent increase in steel prices was out of its control, as was the financial crisis. Transnet acts on government mandate and it was the shareholder that decided that the pipeline should be 24 inches wide instead of the proposed 16 inches.

The company can't be blamed for incurring a R' million cost for adding diesel-powered generators, whose design had to be altered when Eskom's capacity challenges emerged.

In a nutshell, it is not Transnet's fault that consumers will fork out an additional 4c a litre for fuel in two years time because of costs that have gone up by more than 20 percent. Transnet has a capital projects division which assesses everything related to capital expenditure projects, including costs, risks, and forecasts.

It is quite common for costs to increase for various reasons during a project and this is precisely why somebody at Transnet Capital Projects should have been able to detect these risks so they could be provided for in the budget.

Granted, they would not have foreseen the recession, and power outages took most industries by surprise. But rising commodity prices, and delays with statutory approvals have been the order of the day in South Africa, and crime is an old problem that Transnet experiences every day with its rail business.

Transnet executives, who had given a detailed briefing on the pipelines business to the media, blushed when they were questioned about this oversight. They still had an answer, saying management had done a good job to mitigate risks as the increase would have been about R3bn if they had not made certain interventions.

Be that as it may, it is not comforting enough for a consumer who is already paying more for other necessities such as food, electricity and school fees.

Edited by Peter DeIonno. With contributions by Samantha Enslin-Payne, Ingi Salgado and Slindile Khanyile.
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