With a local currency stable at R6,30 to R6,50 to the United States dollar, even with the dollar prices of gold and other major resources mined in South Africa as high as they are, it is not surprising that renewed signs of producer distress are emerging.
This is particularly so for the more marginal operations — that is, mines where production costs are higher. This is becoming increasingly common in the maturing gold mining sector, where the mineral is mined at ever lower depths or where grades — grams of gold per ton of ore mined — are declining.
In this environment, concern about the sustained strength of the local currency is bound to grow. A sensible debate would not be amiss.
A weaker rand would be no free lunch. For example, even as news of the latest threatened gold mining retrenchments hit the headlines in the past two weeks, it was accompanied by a fair amount of agitation over the fuel price hitting its highest historical level — an inland price of R4,39 a litre.
The inflationary effects of a rising fuel price are well known. So let us not glibly call for a weaker rand without being aware that an R8 to R9 dollar would mean a fuel price closer to R5,39 a litre.
In addition, a weaker rand would not suit everyone. It would benefit export industries. But it would have a profit-squeezing and job-destroying effect on industrial sectors dependent on imported raw materials, inputs or manufactured goods.
And whatever some may argue would be the “ideal” level for the rand, we must also address how this level should be achieved. Few, if any voices have been raised in favour of a fixed exchange rate, or “pegged rand”. Argentina’s recent history highlights the cost of relatively small economies seeking to peg their currencies.
The two remaining instruments are lower interest rates — particularly comparatively lower real interest rates — and the building up of South Africa’s foreign exchange reserves. A sound macroeconomic case seems available for both these policy objectives.
Beyond seeking a particular level for the rand-dollar (and rand-euro) exchange rate, greater exchange rate stability seems highly desirable. With South Africa undergoing a difficult period of economic restructuring, decisions about the best investment targets for scarce capital can best be made with some certainty about future movements of the currency. But that, too, is easier said than done.
One could argue that protagonists of a weaker rand have damaged prospects for rational debate with the government and monetary authorities by overstating their case. Some have argued implicitly, or even explicitly, for a return to the R13 dollar, which in 2002 provided a bonanza for most mining companies and other exporters, but seriously damaged the economy in other ways — and would do so again.
That said, a strong rand clearly hampers economic growth and jobs growth. Ideally, the exchange rate should strike a balance between a range of competing local economic interests. And, arguably, that balance is lacking with a R6,40 dollar.
A developing economy such as ours needs a more competitive exchange rate that is undervalued rather than overvalued.
The late 2001/02 weak rand was an aberration. But so is the current R6,40 dollar, even if a marginally lower trend line is justified by the falling political risk factor perceived by foreign investors.
The rand at its current level is damaging most sectors on which growth depends. Export growth is really the only realistic way for our economy to achieve a significantly higher growth path. Yet the ability of the mining industry to preserve jobs, not to mention its ability to create new jobs, is being severely weakened.
The tourism sector, probably South Africa’s strongest potential job-creator, cannot maintain the momentum it developed in the years from 1994 to 2002. And other potential growth sectors — like that part of the clothing sector aimed at niche export markets — are also in decline.
For the mining industry, stagnant rand revenues — where the higher dollar price of minerals is offset by a stronger exchange rate — are coinciding with higher-than-inflation rises in major costs, in particular administered prices of power and water.
Those who manage businesses must do so in a given macroeconomic environment. Right now, that means managing in the context of a strong rand. In mining — and managers in other sectors would take a similar view — the idea would be to do this for the long term, sacrificing as little future production as possible by offsetting the currency impact through a combination of steadily improving technology and human resource investment. In AngloGold’s case, this strategy has seen productivity rise by about 3,5% a year for quite some time.
The focus has long been on increasing the output per worker rather than a low-wage strategy. It makes management sense to avoid, as far as possible, retrenchments that harm the quality of life of workers and their families who fall victim, and negatively affect the morale of those who remain.
Yet it is true that every cent the rand strengthens against the currency of South Africa’s exporters does endanger — in the case of mining — ounces of future reserves as their extraction becomes uneconomic.
While the strong rand is hurting export industries, the solution does not lie in a weak rand. It lies in a rand that is appropriately priced, complemented by increased efficiencies.
South Africa has for some time maintained very high real interest rates. That may have been a necessary tool for stabilising the economy after 1994. But there is now a strong case for questioning whether it is wise to continue with the policy.
There is also a case for a more reasoned debate about exchange rates and their impact on trade and development. This is a challenge to bodies like the National Economic, Development and Labour Council and the Millennium Labour Council, and for the president’s various business and labour working groups and other advisory bodies.
Alan Fine is AngloGold’s public affairs manager