Full steam ahead for Coega: with Canadian company Alcan finally agreeing to develop an aluminium smelter at the industrialised zone surrounding the new Eastern Cape port of Coega, it is all systems go for the province. Neil Ford describes the impact of the new developments on the province's economic future.

After years of delay and uncertainty, Canadian aluminium producer Alcan has finally agreed to develop an aluminium smelter at the new site of Coega in the Eastern Cape Province of South Africa.

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The investment will create many skilled jobs in an area with high unemployment and should help to strengthen the region's industrial base but its impact on the Coega integrated port and industrial project should be even greater. As the scheme's anchor tenant, it is now hoped that a large number of other industrial and manufacturing companies will sign up to invest in what is South Africa's first new port for three decades and a major site of new investment.

The project was originally planned by French firm Pechiney, but its takeover by Alcan cast a shadow over the construction of the smelter and the entire Coega venture. In addition, Alcan has reassessed its entire global strategy over the past couple of years.

However, national and local South Africa government officials held a series of meetings with the company to convince it to proceed with the project and their efforts appear to have paid off.

Perhaps the biggest breakthrough was made in November 2006 when the Canadian firm reached a power supply deal with South African power utility Eskom. Electricity consumption comprises such a large proportion of aluminium production costs that turning raw bauxite into aluminium is often equated with exporting electricity.

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Eskom has traditionally offered some of the world's lowest electricity tariffs, a factor which encouraged the development of a smelter in the country in the first place. With the 25-year power supply deal in place it was always likely that Alcan would go on to commit itself to the site.

Alcan expects to begin construction of the R19.5bn ($2.7bn) smelter close to Port Elizabeth next year with first production due in the second half of 2010. Output is expected to reach 720,000 tonnes a year, much of which will be exported globally from the port of Coega. However, it is also hoped that the proximity of an aluminium plant could encourage industries that rely on aluminium to set up operations within South Africa.

While Alcan will lead the project development consortium, other investors are expected to come on board. The Industrial Development Corporation (IDC), which is already involved in the Mozal project in Mozambique, is likely to take up equity in the venture, while the IDC hopes to be involved in negotiating black empowerment participation.

IDC chief executive Geoffrey Qhena revealed: "We successfully executed the similar functions and roles in the Mozal aluminium smelter and over time built unique project finance expertise. We are delighted to have this opportunity to play a meaningful role in this strategic project which will have a significant developmental impact in the Eastern Cape Province."

Alcan is now holding talks with likely partners and will launch a tender for the front end engineering design (FEED) contract. The company is likely to retain a 25-40% equity share.

Economic spur for Eastern Cape

The Coega Development Corporation (CDC) has been set up to develop the entire 11,000-hectare industrial development zone (IDZ) around the port.

Some zones within the IDZ have already been allocated to particular industries, including petrochemicals; ferro chrome and stainless steel and textiles so that the requisite infrastructure can be provided before tenants put pen to paper. Some other companies have already committed themselves to the Coega IDZ. The IDZ's first tenant, Belgian fire resistant materials producer Sander International, is already in place and the large industrial site is gradually being filled.

The Southern Cross Precision Strip consortium, which comprises German firm Boecker & Wender Stahl (BWS) (51%), the IDC (26%) and Columbus Stainless (23%), is also investing in Coega. Most of the steel will be supplied to the burgeoning South African automotive sector, although some steel will initially be shipped to Germany for rolling to the required width before being shipped back to Coega.

The market development commercial manager of Columbus, Ken Dewar, said: "At present there are no precision strip processors in the country and manufacturers mostly import the material. This is a process that Columbus can't do profitably [alone] and within the standard requirements of the industry."

According to the government's 2006 medium term budget policy statement, "More than 30 potential international investors are in negotiations with the CDC. By mid-October of this year, Coega had signed lease agreements with nine investors to a total value of three billion rand.

The aluminium smelter is expected to attract other foreign investment to the Eastern Cape and will significantly contribute to employment creation and social equity with an estimated 6,000 people required in construction and 1,000 people in operation." It added: "Transnet has recently announced a further R2.5bn investment into the second phase of the development of the new deepwater port. The first ship is expected to dock at the terminal in 2008."

The heart of the Coega venture is obviously the port. Bulk and container terminals are being developed to enable the various investors to export their goods directly from the site. Four dedicated container berths are already under development, allowing access for container vessels with a loaded draught of up to 14 metres.

In the longer term, provision could be made for at least 10 container berths, with 32 berths in total. At present, South Africa relies very heavily on Durban Container Terminal and, to a lesser extent, its counterpart at Cape Town. The provision of an alternative halfway along the coast should provide much needed extra capacity, as long as the required rail links are put in place to enable containers to be moved easily across the country.

The container terminal could be operational by the end of next year, although the government has yet to name the operator. Talks between South Africa's transport umbrella body Transnet and the proposed joint venture of P & O Nedlloyd and TCI Infrastructure collapsed in 2004 and some form of public private partnership (PPP) now seems the most likely option.

With the exception of Richards Bay Coal Terminal (RBCT), most other South African port facilities remain in the hands of government-owned organisations. However, PPPs are becoming increasingly popular in South Africa and the government is keen to encourage private sector participation in the port sector.

Coega port and IDZ scheme should make a substantial contribution to ensuring that the South African economy continues to grow, both by attracting new investors and by providing another outlet for South African traders in the form of the port.

Yet there should also be another less well recognised benefit. Economic activity is still concentrated in and around Johannesburg, and to a lesser extent around Durban and Cape Town. It is vital that growth begins to pick up outside this tripoly to ensure that more people benefit from the economic turnaround.