Economic Watch

Challenge of massive restructuring confronts SA economy

SA icon bites the dust

 Symptomatic of the challenges facing the South African economy, arguably its best known private sector icon, Anglo American, last week suffered the humiliation of a junk credit rating.

On Monday last week Moody’s Investors Service (Moody's) downgraded Anglo American (AAL), its subsidiaries and its long-term issuer rating to negative levels. It concluded a review process initiated in December last year. The review followed an AAL announcement earlier that month of plans to reduce its size by 60%. Along with the layoffs, days earlier, the company also announced suspending its dividend and halving its business units. It also plans to unload mines and smelters.

In its statement on the matter Moody's said its “assessment of a higher business risk reflects concerns over the potential for a further deterioration in AAL’s bulk commodities portfolio, particularly in iron ore, amid low commodity prices.”

Global picture

The impact of the slump in commodity prices worldwide in the wake of downturn of the world’s biggest buyer of commodities, China, was well summarised in the heading to a New York Times (NYT) article early in December: “If It Owns a Well or a Mine, It’s Probably in Trouble.”

In fact, referring to ALL, the NYT wrote: “The pain among energy and mining producers worsened again … as one of the industry’s largest players cut its work force by nearly two-thirds and Chinese trade data amplified concerns about the country’s appetite for commodities.”

At the time ALL’s CEO, Mark Cutifani, said: “Quite frankly we didn’t expect the commodity price rout to be so dramatic and in all likelihood the next six months are going to be even tougher. We have pulled costs out of the business, but we need to do more because prices continue to deteriorate.”

And getting tougher it has.

And that the impact is global is illustrated by the fact that, by way of example, the Swiss company Glencore, also active in South Africa, is scrambling to reduce its $30 billion debt by a third before the end of 2016 by slashing its copper-mining operations in Zambia and the Democratic Republic of Congo and selling much of its agricultural business. Kinder Morgan, the North American pipeline company, cut its dividend in December, a sell-off in the stock within hours.

Socio-economic impact

Indicative of also the socio-economic impact of the situation, it is reported that in the oil and gas industry alone more than 250 000 workers worldwide have been laid off.

South Africa is not spared and, with mining one of the cornerstones of its economy, is particularly vulnerable to what is happening to commodities globally. Mining accounts for about 18% of GDP and according to a KMPMG report “not only employs over one million people – spending R78 billion in wages and salaries – but is the largest contributor by value to Black Economic Empowerment (BEE). Importantly, mining provides job mining opportunities for unskilled and semi-skilled people.”

In this regard the latest news headlines on the mining/commodities sector have ample cause for concern. While the Chamber of Mines claim that 80% of South African mining operations are currently unprofitable, estimates of how many mining employees could be retrenched in the near future vary between 32 000 and 50 000.

The situation in the South African mining sector was well summarised by a headline to a Reuters report last week declaring, “Parts of SA mining sector in the ICU”.

In the meantime, another report points out that every retrenchment affects five or more dependants and the projected shrinkage of the industry might impact on hundreds of thousands of people.

Restructuring of economy

The situation underlines the need of restructuring, not only in the mining industry as such, but also in the South African economy as a whole to reduce dependence on the supply of raw material and commodities.

In a report by the Pan-African Research and Investment Services in 2012 it was argued that “South Africa’s beneficiation policy discussions were currently too narrowly framed and should be broadened to recognise the inextricable link between the exploitation of the country’s high-quality mineral resources and the desire to stimulate a re-industrialisation of the economy.”

The debate about beneficiation in South Africa goes back to the early 1960s when the first large-scale processing of chromium and manganese ores to ferro-alloy started.

As the global economy has entered a new industrial revolution it has become a matter of urgency that ‘debate’ should now culminate in a concrete strategy to restructure the South African economy to meet the challenges the new global environment poses. This should include an approach of value ‘no wastage’ in terms of existing assets like an abundance of raw materials.

by Steve Whiteman

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