Project Changes in Mozambique Prompt Construction Forecast Revision


Thursday, July 06, 2017 5:45 PM/BMI Research

BMI View: Increased activity in Mozambique’s transport infrastructure project pipeline has prompted an upward revision to our construction growth forecast for 2017 and 2018, while delays to the start-up of the Coral LNG project have pushed back our expectation for a spike in industry growth to 2023 rather than 2022. The 10-year growth outlook for the construction market is brighter, with average annual expansion now forecast at 7.6% in real terms, from 7.0% previously.

We have altered our outlook for the Mozambique construction market between 2018 and 2023 following two key developments:

Increased project activity in the transport infrastructure sector

In March 2017, a USD3.2bn contract to carry out the Macuse project, involving a deepwater port linked by a 500km railway to the coal mines in Moatize, was awarded to a 50:50 consortium involving Portuguese firm Mota-Engil and China Civil Engineering Construction.

We had previously excluded this development from our forecast owing to a lack of momentum in the project since it was announced in 2011 and the heavier focus on expanding existing ports and rail to facilitate coal exports.

We are also seeing significant development funding flowing into the roads and bridges sector, which will drive growth in the sector after the government's constrained revenue has seen overall activity drop in recent years.

We are now forecasting industry expansion of 7.1% in real terms between 2017 and 2019, up from 5.6% previously.

Our view for liquefied natural gas (LNG) exports to international markets to begin in 2022

Our Oil & Gas team has pushed back their prediction for the start for the Coral floating LNG project from 2021 to 2022, following further delays in the final investment decision (FID).

Once online, the increase in gas export volumes will provide the government with much-needed revenue to funnel into infrastructure development. We now expect construction growth to peak in 2023, reaching 11.4% in real terms.

Boost For Commodities Export Infrastructure

The awarding of the Macuse project tender to two major international firms is a positive sign for the progression of the proposed port and rail infrastructure.

Further underpinning our decision to factor this into our construction growth forecast is the strong business case for the project: the link would provide a shorter route from the coalfields in Moatize to export terminals than the ones currently provided by the ports of Beira and Nacala, and there is a need for increased export infrastructure capacity to support coal output growth.

This second point is particularly pertinent, as underdeveloped infrastructure remains a key obstacle to greenfield investment in Mozambique's mining sector.

The aim is for the project to create capacity for 100mn tonnes per annum (tpa) of coal. Construction is scheduled to begin in 2017, with the 500km railway and first phase of the deepwater port (with a capacity of 30mn tpa initially) expected to take three years to complete.

We note that the lack of clarity on project financing presents a downside risk to our forecast.

It is understood that Thailand-based firm Italian-Thai Development, which holds a 60% share of the project, will shoulder the burden, though there is limited information on its ability to finance the entire project.

The remaining share is split equally between state port and rail company CFM, and private body the Zambezi Integrated Development Corridor.

Renewed Emphasis On Roads And Bridges

We are witnessing a flurry of activity in Mozambique's roads and bridges sector, as funding from a range of sources provides the government with much-needed support to execute its plans.

Though repairing road infrastructure destroyed by flooding in October
2015 has been a key government priority, budgetary constraints have severely hindered project activity.

In December 2016, the African Development Bank sanctioned USD74.9mn funding for the government for the construction of a 70km road section in northern Mozambique to improve the country's connectivity with Tanzania.

In January 2017, the World Bank and the UK's Department for International Development announced that they would provide USD113mn and USD15mn respectively for the construction of 190km of roads in the Gaza province – the bulk of the required investment of USD170.5mn, with the government covering the shortfall.

Work will be carried out by China's Zhongmei Engineering Group, China Henan International Construction Group Company, Mota-Engil and Uganda's SBI International Holdings.

Finally, in March 2017, Japan signed an agreement with the government to fund the construction of three bridges in the port city of Pemba to connect it with the Palma District.

Gas Export Delays Prompt Forecast Shift

We continue to hold the view that increased gas exports from the start-up of the Coral floating LNG project will provide a boost to the overall construction industry, as the substantial revenue from exports eases budgetary constraints and allows for more spending on infrastructure development.

We have altered our forecast for a spike in industry growth as this positive dynamic takes hold in 2023 rather than 2022, following delays to FID that prompted our O&G team to push back its expected start-up date (see 'Project Delays Push Back Export Timeline', April 20).

Overall, the project is a positive for the construction industry, as the years preceding the commissioning of the offshore terminal will require ancillary infrastructure to be built onshore.

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