The dramatic plummeting of commodity prices in recent weeks is intensifying South Africa’s painful economic malaise.
Sharp falls in everything from platinum to iron ore have hit home at a time when electricity shortages, policy uncertainty and worry over developments in international markets continue to weigh down the economy. The FTSE/JSE resources 10 index has seen massive declines over the past year, shrinking from a market capitalisation of more than R2-trillion to around R935-billion, according to data from Inet BFA.
The decline in commodity prices has severely hurt South African resources companies and some firms have announced plans to retrench workers, despite criticism from unions and the government.
Kumba Iron Ore has seen a dramatic 70% drop in its share price in the past year. The company announced that it will be closing its Thabazimbi mine, resulting in the retrenchment of 800 employees and the loss of 360 contractors.
Kumba’s parent company, Anglo American, has seen its share price on the JSE plummet by more than 47% in the past year. It announced plans last week to reduce employee numbers globally from 151 000 in 2014 to 98 000, and the number of mines it operates from 55 to 40.
Platinum producer Lonmin, whose share price has dropped more than 70% over the past year, is also shedding jobs. Cost-cutting, including the closing of some shafts in the Rustenburg area, is expected to result in the loss of at least 3 500 jobs.
The declining fortunes of companies that were heavyweights on South Africa’s stock market illustrates how bad the outlook for commodities has become, according to Sasfin’s David Shapiro.
He estimates that the combined market value of the country’s top four gold and top four platinum producers is now less than that of a single retailer – Steinhof International.
The punishment being taken by the country’s mining companies has major implications in terms of both employment and the potential impact on other sectors of the economy, such as manufacturing, he said. Although the services sector has become the largest driver of South Africa’s gross domestic product, he added, mining remains a large contributor to exports and the largest source of foreign exchange.
Commodity price weakness has come hand in hand with a steadily strengthening United States dollar, and both have had a negative impact on the rand, which has reached lows of more than R12.70 to the dollar in the past month.
Wayne McCurrie of Momentum Wealth said the gloomy picture is unlikely to improve until the commodities cycle begins to turn.
An oversupply in the market and the resultant build-up of commodity stockpiles is behind the drop in prices, he said. Although slowing growth in China has played a role in the price declines recently, he believes global oversupply is a far more important factor.
“Right now, specifically in iron ore, the guys are just using their stockpiles,” McCurrie said.
The current situation is not unusual, however, as commodity prices usually fall because of declines in demand. “But for the price of oil to halve because of excess supply is very unusual,” he said.
Hikes in US production in recent years, thanks to the development of the country’s shale industry, have seen one of the world’s largest importers of oil turn into a net exporter. After successful negotiations with Iran over its nuclear programme and the lifting of sanctions, the country is expected to double its exports and further contribute to the global oversupply, Investec group economist Annabel Bishop said in a note.
‘Underlying inflationary issues’
Other commodity exporting countries such as Canada, Australia and New Zealand have cut interest rates in a bid to support their economies. But, McCurrie said, unlike these countries, South Africa has “inherent underlying inflationary issues”.
Concern over inflation was one of the main reasons cited by the South African Reserve Bank when it increased interest rates by 25 basis points last week. But the inflationary pressures are being driven directly by administered prices or the prices set by the government, McCurrie said.
Electricity prices are expected to continue to rise, and Eskom will continue to battle to supply the country with sufficient electricity.
The government’s policy decisions on a number of issues have also had unintended consequences for the economy, eroding what could have been bright spots amid the overwhelming gloom.
As an example, Roelof Botha, an economist and adjunct lecturer at the Gordon Institute of Business Science, cited the government’s changes to visa regulations and their impact on the tourism sector. Tourist arrivals from Africa for the first quarter of 2015 declined by 5.6% compared to the first quarter of 2014, the number of travellers from overseas over the same period declined by 7%, and the combined loss to the economy is R2.7-billion, he said.
‘Debilitating’ visa regulations
“South Africa boasts one of the finest and most diversified tourism destinations in the world,” Botha said. “It is a pity that government cannot seem to understand the debilitating effect of the new regulations.”
Several pieces of proposed legislation are also contributing to policy uncertainty.
This week the National Assembly’s portfolio committee on public works held public hearings on the proposed Expropriation Bill.
According to Banking Association South Africa, in its current form the Bill presents an unquantifiable risk to their industry. This is because of problems such as the power it grants the state to expropriate land before owners can approach the courts, and the level of compensation offered to owners.
There is a substantial amount of bank credit tied up in the property sector – approximately R2.3-trillion in mortgages, of which R70-billion is in the agricultural sector.
The Bill follows other policy measures that have been publicly criticised, such as moves to cap land ownership.
This year has also seen a spate of crises at large state-owned enterprises such as Eskom, PetroSA and the Passenger Rail Agency of South Africa.
Domestic uncertainty is being exacerbated by global factors, not least of which has been a gradual slowdown in the Chinese economy from double-digit highs in the earlier part of the decade.
This has weighed on global demand, especially for commodities.
The recent plunge in Chinese stock markets has further muted growth expectations from the world’s second-largest economy.
Continued hints that the US will begin raising interest rates, which may have negative effects for emerging markets like South Africa, are also overshadowing local events. But on Wednesday, the US Federal Reserve opted not to raise interest rates, deferring the possibility of a hike to September.
The pressure on the South African economy is so acute that this subject was the focus of the ANC’s mid-year lekgotla this week.
Among the issues discussed was the uncertainty caused by policy measures, including the new visa rules, land reform strategies and changes to mining laws.
Botha said it is crucial that the government deals with these concerns.
“The overregulation of the South African economy is slowly but surely starting to sabotage the economy’s potential to create jobs,” he said.
Public sector boon gives hope amid gloom
Amid the continued economic gloom, there are some bright spots.
Figures released this week by Statistics South Africa (Stats SA) revealed that public sector capital expenditure has increased in the past year.
Its latest report on capital expenditure by the public sector for 2014 revealed that the government and its entities increased their spending to R255-billion from R225-billion the previous year, a nominal increase of 13.5%.
This kind of spending, including building new infrastructure and maintaining existing infrastructure is seen to be positive for the economy as it helps to facilitate growth.
According to Stats SA, public sector companies accounted for the largest share of capital expenditure. Their share was R140-billion, or 55% of the total.
Public corporations were followed by municipalities, which spent R53-billion, or 21% of the total. The large metros, in particular, were responsible for this, with the likes of the City of Johannesburg spending R7.7-billion on projects such as the Rea Vaya bus service, pedestrian infrastructure and the Watt Street transport interchange in Alexandra.
Momentum Wealth portfolio manager Wayne McCurrie said that, despite the bad news, South Africa is by no means a basket case. The growth of its neighbours will be very positive for South Africa in the long term, he said. Some local firms are already benefiting. Barclays Africa, of which Absa is a subsidiary, revealed this week that revenue from the rest of the continent has reached 20% of the group’s overall total.
The private sector has also been investing significantly in the government’s renewable energy programme. Private firms are spending about R193-billion to build green-energy plants.
Expectations are that this could double if the programme is expanded and independent power producers are given access to the grid.