"Isabel, just look at the rand. It used to be pretty well pegged against the Australian dollar but that is history. It has lost 12% against the US dollar this year. It’s even fallen 20% against the Israeli shekel! We’ve got the strongest gold price in the decades and we can’t benefit because of bl***y Eskom...
"Everybody else who produces gold is benefiting! But, oh no, not South Africa!...
Talk about a rant! This was my brother, a director of a big international bank, on the state of the nation. Is South Africa going to the dogs then? "Isabel, I hope I’m wrong — but things aren’t looking good"...
He’d just seen the latest news on the power crisis which has followed energy utility Eskom’s failure to invest. He thought it looked as though South Africa was shutting up shop! Eskom now says it will not link up any new construction projects for six months. That shows it sees no speedy solution. The government is perceptibly worried. To combat mounting criticism it proposes blocking agriculture imports to help the farmers.
Well, there was good news... the economy still looks robust
Now only last week I was telling you that South Africa is not all bad news. Anyhow, despite my brother’s negativity, it was not looking all that bad.
Take the recent budget news. The economy expanded by 5.3% in the fourth quarter. Much, much better than the 4.3% expected! Manufacturing growth was a staggering 8%. The rand rallied against the dollar on this news. Of course this was mainly down to agriculture, construction and services. Not mining! Which contracted by 1.7% — no surprise there!
Still the figures give the government room for some manoeuvring on infrastructure investment. This is critical. The power crisis has to be resolved. My brother is far from convinced there’s been any real progress. He reckons that the crisis is nowhere near ended. Neither mines nor industry can expand on 10% less power than normal.
But Gold Fields is telling government how it is
Gold Fields’ announcement that the slump in production could lead to big job losses proves the point. As many as 7,000 jobs could go — 13% of their workforce! And a major ZAR5.4bn project has also been canned. Most of this is blamed on the power cuts.
Cash costs are up too! It is getting more expensive to operate there. The bills jumped from R94,390/kg (£6,100/kg) to R116,250/kg (£7,500/kg). Gold Fields reckons that the recent power shutdown is 90% to blame. Mines just can’t cut back" power is used just to keep the mines running. This means cool, dry and safe! More than 50% of electricity used is just for essential maintenance. And the last thing mines need is more deaths due to overheating or flooding.
Is Gold Fields making a mountain out of a molehill? Is chief executive Ian Cockerill the world’s biggest whinger? He has certainly spelt it out to government in more bitter words than his rivals.
The optimists say the mines will adjust to this power crisis. After a time, as in 2001, it will be business as usual. There is no other choice.
But what if the pessimists are right? What if Gold Fields’ gloomy outlook really is a more realistic measure of prospects for South Africa’s miners? Then South Africa’s growth may not continue at the same pace. And what will happen to the miners’ share prices?
At the moment the soaring price of gold, platinum and diamonds, etc, is papering over any cracks. This has helped to cushion lower output for companies such as Angloplat, Impala Platinum, Aquarius Platinum, AngloGold, Gold Fields and Harmony.
There are a few which up to now have managed to boost production — such as Metorex, Kumba Iron Ore, African Rainbow Minerals, Assore and Exxaro Resources. They’ve reported record margins and earnings. But that was history. What matters is what happens next.
Power cuts are hitting mines hard
Miners are still complaining that it is daft to hit them for power cuts. Chamber of Mines CEO Mzolisi Diliza is saying that not all industries were implementing load-shedding. He felt mining had been unfairly targeted. Yet mining contributes 50% of South Africa’s merchandise exports. That is around 10% of GDP. They can’t just flick a switch and turn their mining machinery off. If a mine loses 10% of its power it loses 20% of its production (at least).
The government just doesn’t seem to be listening. Around mining, fraught with safety issues, skill shortages and now no electricity, unrest looms large. Should falling production bring revenue down with it, then wages are endangered.
Eskom’s ban on new development cuts back the options for those who would move jobs. Mike Schussler, an economist from T-Sec, says this decision could significantly limit economic growth. As he said: "Job creation is going to take a severe knock. Fourteen guys that could've been employed at a new petrol station are now going to remain unemployed for longer."
No wonder investors are rushing to buy their gold via ETFs and not mining shares! Better to get straight down to the metal!
Think about that when you reach for the light switch.
Erin and Isabel
