The David Gleason Column
Is the Johannesburg Stock Exchange (JSE) on the verge of becoming more like a First World bourse than one which has the characteristics of an emerging market?
Well, it looks that way to me – and, I might add, to more than a handful of investors and analysts. Here is what is fuelling this change. It is now clear that more and more major South African companies will seek to transfer their primary listings to a northern hemisphere stock exchange – almost invariably, I would guess, to London (though in the case of Sappi, it’s more likely to be New York).
The move last year by Billiton, grown out of Gencor, to a United Kingdom domicile and London listing, is now to be emulated by Anglo American. Others will follow, especially after Minister of Finance Trevor Manuel has openly said he believes primary listings abroad for South Africa’s biggest businesses are right for the companies and the country.
So one can expect a steadily lengthening list of companies which will no longer be available as a result of the inevitable restructuring which accompanies global ambitions. Amcoal and Minorco will disappear, absorbed into the maw of the Anglo American Corporation. So will Amic, this country’s premier heavy industrial combine. Rather smaller but still important, New Central Wits will also fade away.
Billiton, of course, is in the process of removing Ingwe, the world’s biggest steam coal exporter, and Samancor, the world’s largest producer of manganese, chrome and their associated ferro-alloys. Ingwe will be wholly owned by Billiton, and Samancor will be held between Anglo and Billiton, 40% to 60%.
In effect, the South Africa exchange will fall in value and, conversely, the London exchange will grow. On a particular day, the JSE’s market cap will fall by an amount, and will be replaced by a small rise in the Financial Times Top 100 index (the Footsie 100).
The impact of this new Great Trek by the mining houses to foreign domiciles will bring other changes in its wake. For a start, the JSE will then be dominated, not by resource companies which have held pride of place ever since it was established more than 100 years ago, but by big banks and financial services companies. This is why the JSE will start to look more like a First World stock exchange.
Then there’s the issue of what will happen to mining analysts who work for stockbrokers. As the concentration of mining power moves to London, there will be a sharp reduction in the number of jobs available for them in this country. Some will be invited to shift to London or elsewhere; others will have to look for alternative employment. This is likely to impact more on the bigger brokerages which are either already international or have strong global links than on smaller and medium-sized firms. The latter will find it easier to handle such analysis locally than the internationals, which may find the tendency to gravitate to a mining research centre like London unstoppable.
Another intriguing feature is that, with the removal of Samancor from the JSE’s lists, what is now called the manganese board will be down to a single entrant (Assmang). This underlines the extent to which power in certain industries is now being concentrated. For example, ChromeCorp and CMI are now wholly owned by the Swiss-based international minerals and metals trading house Glencore. So, from being a trader in ferro-alloys, Glencore has shifted into a vertical integration programme which makes it, after Samancor, the world’s second largest producer. And it is certainly worth noting that the link between ferro-alloy producers and stainless steel is now so strong that it is a core feature in many global resource portfolios. This is why astute traders such as Glencore have extended their reach from trading into production.
Almost inevitably, a feature of these absorptions will be that transparency will suffer. It hasn’t gone without notice, for example, that since Billiton bought out the minorities in Alusaf, the standard of information about that company’s operations has fallen sharply. Must we expect something similar for Ingwe, Samancor, Amcoal and Amic? Probably. And if I’m right, what impact will this have on the information streams on which investors rely?
Another feature of the current cycle is the extent to which major resource companies are avoiding the purchase of distressed producers. Instead, they are buying minority stakes in companies they already own. These companies invariably possess strong balance sheets, so there’s no need for refinancing.
Billiton executive chair Brian Gilbertson has said on more than one occasion that this is an ideal time to buy good mineral assets at acceptable prices. But his own company is notable for a vast cash reserve and a concentration of purchasing effort on its own minorities rather than expansion into other areas.
What all this does is underline the vast change taking place in so many aspects of South African business life – many of which, vital though they are, pass unnoticed and unremarked.
ENDS
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