The mining and manufacturing production statistics released this week may have been better than expected, but they cannot hide underlying structural weaknesses both sectors need to address in order to reach their full potential.
On Thursday, Stats SA reported that mining production rose 7.5% in January this year compared to a year ago and rose 6% when adjusted for seasonal factors compared to December last year.
Mineral sales rose 24% in January compared to a year earlier.
The performance was driven by iron ore, platinum group metals and coal on the production side as well as gold and nickel on the sale side.
At the same time, Stats SA reported that manufacturing production fell by 2% in January from a year earlier but rose 2.5% on a seasonally adjusted basis compared to December, after falling 3% in December from November.
The Nedbank Economic Unit says in a research note that this performance is better than expected, as production was expected to slump by close to 5%.
The growth of the finance, real estate and business services over the past two decades may have dwarfed mining and manufacturing but both sectors remain crucial.
Mining now contributes about 7.5% of GDP, while manufacturing hovers around the 10% mark.
South Africa’s GDP at the end of 2019 stood at R 5.1 trillion
According to the Quarterly Labour Force Survey, in the last quarter of 2019, mining employed 430 000 people, after adding 11 000 over the quarter while manufacturing shed 39 000 jobs to stand at 1.72 million jobs.
Both sectors can do so much more.
The first thing both sectors need is steady and reliable power supply, which means fixing the elephant in the room that is Eskom, or allowing self-generation, where regulations have been eased.
The Nedbank research note points out “pressures faced by the mining sector have worsened in recent weeks.
Locally, power supply disruptions persist, and the benefits government’s measures to improve supply are not likely to be fully visible for at least two years.”
Nedbank also points out that an explosion at Anglo Platinum’s Rustenburg processing plant will affect about a third of the PGMs supply chain
This places companies in a quandary and resolving it depends on whether companies trust government to fix Eskom within two years.
If a company believes that Eskom will be fixed within two years it can choose to get by on limited power supply but if it believes it will take longer, then it may be worth investing in its own power supply, the smallest of which now requires no license.
In mining, Mineral Resources minister Gwede Mantashe must be given credit for bringing stability to the sector.
He came in at a time when the industry was at loggerheads with his predecessor, Mosebenzi Zwane, hurling insults and displaying open contempt on global stages over allegation of State Capture and corruption.
The relationship was also characterised by threats of the use of declaratory court orders to resolve issues such as continuous recognition of empowerment, the “once empowered, always empowered” principle in the mining charter.
The charter has since been passed last March and while contentious aspects such as ministerial powers to change rules remain, the charter should have largely brought certainty and measures to allow companies to generate their own power should help.
There are no perfect conditions or perfect legislation to invest in. Private capital cannot keep moving goal posts and demanding more without giving anything and ministerial powers are only a problem if they are in the hands of a minister you do not trust.
The next and more important intervention that both sectors need is to have South Africa’s export linkages fixed.
Nedbank notes that the negative contribution to the annual figure was from export oriented sectors.
The decline was due to wood and wood products, paper, publishing and printing which fell 6.7%, motor vehicles, parts and accessories and other transport equipment fell 5.6% while textiles, clothing, leather and footwear fell 10.3%
Fixing the export value chain starts with lowering of port and rail costs and improving the efficiency of the logistics value chain.
From government’s side that process is led by Transnet with a Market demand Strategy investment programme of over R 300 billion to invest in rail, ports and pipelines and invest ahead of increasing demand.
Poor economic growth has meant anticipated demand will not materialise, but state capture and corruption investigations have now also cast doubt on the process.
Transnet needs to pronounce whether it’s still committed to the MDS and resume procurement spending while cleaning up internally.
South Africa’s exchange rate at current levels of around R 16 to the dollar appears to make South African exports competitive without bringing imported inflation.
There should be a policy decision to keep the exchange rate competitive and intervene if necessary, despite the scars of 1992 when defending the rand cost the country billions to no avail.
The sad truth for both sectors is that short term outlook has now moved from subdued to bleak due to the outbreak of the Coronavirus.
The Reserve Bank of Australia recently pointed out that coal consumption by Chinese power stations are running low for this time of the year, which lowers demand.
Lower manufacturing activity due to weak consumer demand will damped demand for most minerals.
In a research note published o Friday morning, Nedbank calls the Coronavirus “The Black Swan of 2020” and expects global growth to be revised downwards, with China and Italy the hardest hit countries.
Nedbank notes that the South African economy is highly exposed to economic conditions in China and the world economy through trade, services and financial linkages.
“The economic threat posed to an already frail domestic economy is therefore significant.”
It says. “The outbreak is expected to hurt growth, hitting the export-orientated mining and manufacturing industries as well
as the broader travel, tourism and hospitality industries the hardest. The risk of company closures and job losses are the highest in these sectors.”
Nedbank expects the Reserve Bank’s Monetary Policy Committee to follow the example of the Federal Reserve Bank in the United States and the Bank of England and cut interest rates, supported by low risk of inflation as oil prices are expected to fall.
Nedbank has revised its GDP forecasts for South Africa downwards to 0.3% in 2020, 0.9% in 2021 and 1.1% in 2022.
“The risk of a recession is high,” the bank concludes.