South African logistics utility Transnet is considering up to R200 billion in cuts to its capital expansion plans over the next three years, two sources at the company said, as the global demand for iron ore and coal stalls.

The utility, four years into a seven-year plan to spend R336.6 billion expanding railways, pipelines and ports, held meetings last week at which it decided to cut projects that were not sure to generate revenue, one source said.

A second senior source confirmed the “drastic” plans meant capital spending over the next three years under the plan was likely to drop to R100-R150 billion because demand for the iron ore that Transnet ships is falling on slow growth in China.

“It’s because of the downturn – the volumes are not matching that well with the capital expenditure,” said the source, adding that the company’s plans to expand its coal and manganese lines would not be affected.

However, Transnet spokesman Mboniso Sigonyela said the firm’s capital expenditure plans were unchanged.

“We expect to continue with our programme in line with market demand. Our current seven-year rolling plan is R336.6 billion,” he said.

After years of neglect, Transnet is catching up on building and maintaining infrastructure but it can’t fund it all from its own profits and has had to tap the markets and borrow heavily in recent months.

Financing costs increased by more than 9 percent last year and as Transnet wants to stay inside a self-imposed gearing limit of 50 percent, it now has to cut back.

One source said the up-front payment for 1,000 new locomotives had added to the pressure on its funding position. At its results in July, Transnet said it still had more room to borrow, but it is being hit hard by a slowdown in commodity exports and a general weakness in Africa’s most advanced economy, now forecast to grow at less than 2 percent this year.

The senior source at Transnet said the firm had negotiated with unions to avoid any layoffs “in the next two years or so”. – Reuters