Mining Sector Faces Wage Conflict.

The mining sector faces a new crisis. Talks have been launched between gold mining companies and the unions, with demands for wage rises of up to 60%. This comes as output is in decline, rival mining unions are fighting a turf war, and costs are being pushed up, not least by parastatal Eskom. So what do those in-the-know think is looming?

Expert views

1. Frans Cronje of the SA Institute of Race Relations

If market forces determined wage levels in mining in SA they would be significantly lower than they currently are. Controversially this would be a better state of affairs in many respects to the one that currently applies in that sector where wage levels are pricing workers out of jobs and mines out of production. Of course many will take issue with this analysis but they would then have to accept that the consequences of the policies they support must necessarily contribute to a declining industry and therefore less overall social and economic advancement and upliftment. In addition it is important to keep in mind that post-Marikana, low cost labour became politically incorrect. Hence even where certain classes of investors would be able to employ semi-skilled South African they will shy away from this fearing the inevitable backlash from parts of government and civil society. The unhappy conclusion is that the future of the mining industry as driver of employment does not look good. Mechanisation will increasingly be the way to go as miners seek to lessen their exposure to the political heat that attaches to employers of large numbers of semi-skilled workers across South Africa. There is an upside to this trend that in turning to mechanisation, and particularly robotic drilling, gold miners to reach even deeper underground and access new seams that may prolong the life of certain mines. However the investment in this technology will require certainty over mining rights and policy which is unfortunately lacking.

2)Independent Analyst and Economist Ian Cruickshanks:

I notice that Unions never make requests – they make demands The mining industry is really important to the economy. Mining makes up 10% of South Africa’s GDP. In addition, there are all the services around mining. If this wage round leads into a protracted strike, it will have a significant impact on the economy. The 60% demand is unaffordable, as some mines are close to break-even, or operating at a loss. So a big increase in wages would mean further mine closures and more unemployment. The situation has never been more desperate than it is now.

Conclusion

Trouble is ahead. The fan is spinning. The only question is the quantity of shit flying in its direction.

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Vodacom Results for the Year to March.

The Vodacom results seemed impressive to me. At a time when there is such fierce competition in the mobile communications industry, CEO Shameel Joosub delivered an assured run-down of the business. It was interesting that neither he nor his CFO dressed up in suits. Indeed the CFO looked like a lecturer at a minor university who hadn’t been near a barber for many a month, but he was comfortingly sharp and informed when answering questions. The numbers were not bad, with revenue up 4.5 percent, heps up 23 percent and the dividend up 10.6%. We were told of an increasingly challenging environment, with the consumer under pressure, particularly at the lower end. There is still a big growth in data, especially on smartphones. And data in SA and elsewhere seems likely to be the main growth driver. The management team seem to believe there are good opportunities from international expansion, and are actively looking to enter new markets.

Expert views

1. Malcolm Mac Donald of Tersos

Margins on data are continuing to expand, while prices fall, and volume grows. This is astonishing. With data currently 30% of revenue, and 75 % of the network LTE ready, apparently the bottleneck to growth is access to spectrum. Vodafone procurement gives Vodacom the benefit of scale and they continue to reduce costs on network provision. There are most likely customers still trapped by their 24 month contracts who would have pursued cheaper contracts with other providers, but new pricing initiatives will most likely attract enough new customers to offset this. So, all in all, a compelling and excellent set of results from Vodacom.

2)Mohammed Nalla of Nedbank:

The market seems to be disappointed with Vodacom’s results, with the stock down 3.75% by mid-afternoon, vs. MTN’s -2%. As expected, domestic growth appears lacklustre while international growth continues to be the primary focal point. From a revenue mix perspective, the focus remains on growing data revenues as voice continues to remain pressured. Nothing surprising here. The potential for growth using bolt-on acquisitions on the continent is one that investors will look at with care, cognisant that Vodacom should not overpay for assets. On the positive side, the increase in the dividend is promising and will certainly please investors who hold Vodacom as a dividend play. This is arguably one of the most promising rationales for holding telecom stocks, as the industry moves into a more mature phase requiring less capital expenditure and looks at cash-generative returns to shareholders.

Conclusion

Vodacom has a large customer base, a supportive and knowledgeable major shareholder and is looking good. Telkom should never have sold its stake.

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Additional Comment on South Africa Trading More with Africa

1) Peggy Drodskie of SACCI

This survey seems to confirm that with the economic woes being experienced in the countries with which South Africa has in the past had strong business ties, order books are not as robust as before. South African manufacturers are therefore finding alternative markets in Africa. This coupled with the fact that the growth rate in many African countries is relatively high provides a market for South African products. In addition, the tripartite free trade agreement between the three major trading blocs in sub-Saharan Africa (SADC, COMESA and EAC)has attracted significant foreign aid for infrastructure development. In addition African states are opening their doors and encouraging trade and investment. Thus it makes sense for South African manufacturers to turn to Africa .

SA is Trading More With Africa.

Engineering News is reporting on a Manufacturing Circle survey which suggests a jump in South African exports to the rest of Africa, with 50% of those questioned saying they now export more to Africa than to Europe. This is yet another indication that the pattern of our trade is changing, with a swing away from traditional markets and a move to our neighbours in Africa and our BRICS partners. Here is a link to the article: http://www.engineeringnews.co.za/article/sa-manufacturers-have-turned-export-attention-to-africa—survey-2013-05-16

Expert views

1. Duane Newman from Cova Advisory:

With all the positive growth projections on Africa compared to the rest of the world, these results do not surprise me. I would expect the biggest opportunities and growth areas to be in consumer spending and infrastructure projects in Africa. By 2020 it is expected that the consumer alone will have a spending power of $1.4 trillion in Africa, with over 50% of the African people living in cities. This will definitely create many more opportunities for South African businesses focusing on the consumer. The proposed free trade area for Africa is a challenging one to move forward, as many of the African countries are still heavily reliant on customs duties as a source of government revenue. One only has to look at the R42billion (approx. 5% of total tax collected by South Africa) paid to our Southern African Customs Union neighbours in 2012/13 – where the majority of their revenue comes from an allocation from the customs duties collected under the agreement. Without this funding these countries (especially Lesotho and Swaziland) would literally collapse. I hope that the South African exporters are taking advantage of the numerous government grants on offer to expand their manufacturing base, but also to do research and to get a better understanding of the opportunities in Africa.

2. Craig Pfeiffer from ABSA Investments:

China and Europe are traditionally our large key export markets but one can read into the survey that perhaps a significant chunk of the exports to China is in the form of raw materials rather than manufactured or beneficiated goods. Exports to Europe are lower as their demand for our manufactured goods has been substantially reduced by their own domestic recessionary conditions. With the African continent growing at over 5% there is a market on our doorstep for our manufactured goods and the proximity of the market appears to facilitate exports from the country. The Walmart acquisition of Massmart has highlighted the importance of Africa as a growth area and we have already seen the pioneering work of Shoprite into Africa and the current scramble to expand into the region by the latecomers. This survey highlights the opportunities that do exist on the continent and the opportunities that are being exploited by the more nimble-footed manufacturers.

3. Chris Gilmour from ABSA Investments:

None of this is surprising. South African manufacturers, with a few notable exceptions like SABMiller, tend not to be very globally competitive on price. Thus the rest of Africa, where the price of just about everything is very expensive, is an obvious destination for our manufactured goods. The weak rand improves that attraction even further. And while Chinese manufactured goods have been very cheap for many years now, that is changing, albeit very slowly, as wage rates in many parts of China rise sharply. When one takes account of shipping costs, the comparative advantage that Chinese goods have enjoyed over many other countries in terms of price is beginning to be eroded. Although SA manufactured goods may not be cheap, they are least relatively well made and reliable, so the market for these goods in Africa should grow. An obvious example here is the SA motor industry. At long last we are starting to see motor exports into the rest of the continent.

Conclusion

Watch this space. As long as African countries can work together, and can minimise instability, corruption and nepotism, the potential is massive.

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Are Power Cuts Looming?

It’s getting cold at night in South Africa, and power utility Eskom has a monumental task in keeping the power flowing. There is a tiny margin between peak demand and peak supply, and so ZA Confidential asked three of our leading commentators for their views on whether or not we will soon be enduring power cuts. Unfortunately, it seems it’s not a matter of if, but when, the lights will go out.

Expert views

1. Mike Schussler from Economists.co.za:

Having had my own power out for four days, I must say that yes there will be power cuts – and the question is “how big and how many”, rather than “if”. I believe it will happen but not as bad as, say, in 2008 – and it should not take much of GDP away. But it will be a major hassle factor for households with more expenditure going to batteries, generators etc. I suspect though that, along with labour issues, this will be one of the two big internal brakes on the SA economy.

2. Dawie Roodt from the Efficient Group:

I am afraid I think we will have blackouts this winter. The reserve margin at Eskom is simply too small and a small hiccup will result in a power cut. Furthermore, I also think that the current projects are unlikely to come on stream on time -which means that blackouts are likely to be with us for at least two years more.

3. Chris Gilmour from ABSA Investments:

Let me begin by stating that I believe that Eskom CEO Brian Dames and CEO Paul O’Flaherty (if he stays) will do their utmost to ensure that the lights do stay on this winter and that we, the citizens of SA, are not subjected to rolling blackouts. But this winter, for the first time ever, we face a real and perhaps intractable problem. The combination of an extremely low (virtually zero) reserve margin, a maintenance schedule on our ageing power stations extending well into the winter season and the likelihood of a very cold winter could easily result in a situation where Eskom is forced to ration electricity via rolling blackouts (or in politically correct Eskomspeak…”load shedding”). It’s not something that Eskom will want to happen but unfortunately, due to a confluence of events largely beyond their control, the situation is dire. I hasten to point out that it is not as dire as it was in January 2008, when unscheduled and widespread rolling blackouts were the order of the day. Back in those days, what little coal that was left in the power stations was mainly a black slurry of coal dust and fine rock particles. Stocks had been driven down to an average of a few days due to a combination of cost-cutting and incompetence. But today at least we have plenty of coal – this season’s possible crisis will be caused not by Eskom’s incompetence but by bigger factors, such as not making the decision to build (new power stations) Medupi and Kusile until well into last decade – and by persistent quality problems and industrial action at both of these new stations. Medupi should have had its first generator up and running in May last year. Had that happened, the power station would now be adding around 1.6 Gw into the national grid and we wouldn’t be staring down the barrel of the power outage gun. But unfortunately, Medupi’s first generator will only begin producing in December this year, far too late to make any difference to this winter’s situation. Provided Medupi does indeed come on stream in Dec 2013, that should relieve the situation to an extent next winter but in reality, we will need to have at least half of the generators working and producing a combined 2.4Gw before we can even think about relaxing a little. Kusile’s first generator should start contributing to the grid from about 2015 and by then the immediate threat of power cuts should be lessened to virtually zero probability. I’m not a betting man but in the absence of a very mild winter and/or divine intervention, my money would be on there being at least some rolling blackouts this winter.

Conclusion

It is time to stock up on candles, get spare batteries for the torch, and load the flashlight app into your smart phone. I just hope we will all be happy having to watch our evening TV shows in the dark (bad joke I stole from Glen Campbell).

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Retail Sales Rusty in March

In March, retail sales rose by just 2.8% year-on-year. And economists are reluctant to draw much from these numbers because of the high number of public holidays in the month. However, this latest indicator is yet another sign that the economy is far from flying.

Expert views

1. Azar Jammine from Econometrix:

It is extremely difficult to draw conclusions from this data, because of the role of public holidays, including Easter. This March had two or three fewer working days than March last year. There has been a tendency in recent years for lots of shops to be open on public holiday, and some people have been shopping more. So I am unsure whether this is a strong or a weak number. Therefore we could see a huge rebound in retail sales in April, as we saw with the April rebound in vehicle sales.

2. Dennis Dykes from Nedbank:

This number was slightly better than I had expected – I had expected an increase of 1.8%. Public holidays may have helped or hindered retail. Overall, the trend is not all that encouraging – with sales rising at a very moderate rate. Real disposable incomes are not rising as they were. Generally, employment has slowed. Interest rates are still low, but access to credit is still really tough.

3. John Loos from FNB:

Monthly data can be volatile, and for this reason we prefer to focus on the 3-month moving average to analyse the trend. For the 3 months up to and including March, the real year-on-year growth rate in retail sales was 3%. This implies a slight 1st quarter improvement on the final quarter of 2012 which recorded only 2.4%. To get a longer term perspective, the March level of real retail sales brings the cumulative growth since the pre-recession high of April 2008 to 14.4%, coming after a 2008/9 dip in sales. While representing a fairly good recovery, this period is still a far cry from the 60.6% growth rate from January 2002 to April 2008. The mild early-2013 improvement in real retail sales growth could possibly be explained by an estimated rise in real economic growth, after widespread strike action in the 2nd half of 2012 slowed economy-wide production to abnormal lows. In addition, a slight slowing in retail price inflation must also have contributed slightly to improved 1st quarter real retail sales growth. However, we remain of the belief that the slightly better 1st quarter growth figure doesn’t mean any looming major upturn in real retail sales growth. Rather, after often far-exceeding even the healthy real household disposable income growth rate for much of the last 3 years, we believe that real retail sales growth has come down more into line with real disposable income growth.

Conclusion

The retail sector remains fragile. This latest data is not clear-cut and therefore we will have to largely focus on other indicators to see the true path of the economy. Maybe there will be some useful clues later in the month when the Reserve Bank brings its views to the fore?

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Telkom Appoints New Strategy Head

My initial reaction on hearing that Telkom has appointed a new strategy head was to ask what had happened to the ostrich. This semi-public, semi private, company has lost the way, and I suspect much of the blame lies with its main stakeholder, the State. The new Head of Strategy, Dr Miriam Altman, is an impressive individual, serving on the NPC. But what of the Board of Directors and the CEO? Are they not supposed to provide the lead, to decide on strategy? Or are they mainly political appointees who know far too little about the challenges of steering a telecoms company through the rapidly changing challenges in this highly-competitive industry?

Expert views

1. Mario Pretorius, CEO Telemasters:

In appointing a part-time Strategy Director, one wonders how seriously Telkom is taking its future. Dr Altman will retain her position on the NPC and effectively liaises with the President’s inner circle. It is entirely possible that Telkom’s future may be directed not by Public Enterprises Minister Malusi Gigaba, but from the inner circle itself – and that could be severely problematic. In this enormous and varied behemoth there are a wide range of products and services and enormous, expensive bets on the most appropriate technologies are laid. Given the more than 400 new competitors and a changing regulatory landscape, a keen observer would have expected an experienced and serious industry insider to fill this important position. It is debatable what a PhD in Economics with no industry and no business experience will add to Brian Armstrong’s idea of the future. The move makes no -pardon the pun – strategic business sense, which is good news to the Barbarians pounding at the Gates. This looks like a move to imbed an insider – appointed by the CEO. I wonder how Telkom might be used to fulfil Dr Altman’s other mandate – creating jobs, as a goal for the Centre for Poverty, Employment & Growth – where she still serves with 7 staff?

2. Chris Hart from Investment Solutions:

Telkom has been in an unfortunate position where its strategy has been mangled over the past few year, having to deal with a number of stakeholder interests, notably the State. A huge amount of value has been taken away. It needs a huge overhaul in its strategy, as it is in a rapidly changing sector, with powerful competitors.

3. Malcolm MacDonald from Tersos Business Solutions:

Miriam Altman’s recent appointment as Head of Strategy for Telkom is interesting, noting that her background gives no indication of special interest in technology or telecommunications. Economics and Philosophy are relevant in any strategic role, though, so the degree to which she allows the technology leaders in her team to support her will be crucial. The rapidly decreasing cost of bandwidth, the trend to Voice over Internet services, and the eventual abandonment of voice-only connections are pressuring all of the telecoms companies. The role of Strategic Head for Telkom is a difficult one, taken on at a difficult time for the telecoms industry. So for the nation, and for the improvement in overall business communications, we hope she can find the right balance between great communications products for the nation and profitability for the shareholders – but given a choice, I’d much prefer the first one.

Conclusion

Telkom clearly needs a strategy, the sooner, the better. Once can only hope that this can be devised and implemented efficiently, without political interference.

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Astral Foods Interim Results to 31st March

A dire set of numbers, with headline earnings a share falling by 82%, revenue rising just 5% and continuing complaints about Brazil and the EU dumping chicken on the SA market. CEO Chris Schutte also blames sluggish consumer spending and the high cost of feed for his ruffled feathers.

Expert views

1. Mohammed Nalla from Nedbank Capital:

Quite a disappointing set of results, specifically the decision to forego an interim dividend in light of the poor results. Astral has been a healthy dividend payer in the past and this move may well diminish appetite from investors that look for a healthy dividend yield. Astral has been impacted by higher imports from Brazil and the EU, and increasing stock levels in the industry. Another headwind has been the escalation in feed costs which have risen by 21.9% over the reporting period. The expectation is for a continuation of this trend which will weigh on the earnings outlook. This is exacerbated by labour unrest and industrial action which also represents a further impediment to earnings going forward.

2. Francois du Plessis from Vega Capital:

“Today Astral joins the ranks of an infamous list of well-regarded companies (Anglos, Implats and Old Mutual to name a few) which had to cut or even skip dividends as pressure on cash flow mounted. After cutting its Sept ’12 annual dividend by 17% in Nov last year, Astral surprised friend and foe by skipping its interim dividend today. A cash outflow of R93 million was reported for the period. The net debt to equity ratio increased to 16,9% from 6,6% at 30 September 2012. This was mainly as a result of the new feed mill under construction. Although the Poultry Division was bleeding, the Feed Division (44% of turnover) stood its ground. Operating profit marginally increased by 1.5% to R156 million (March 2012: R154 million).This set of results is indicative that even the best managed companies are vulnerable to external shocks. Astral, has a strong track record of creating value for shareholders. However it might take a while for Astral to return to its former glory.

3. Francois Dubbelman from FC Dubbelman and Associates:

Astral’s results mirror the challenges the South African poultry industry is facing with regard to cheap imports from abroad, high input costs and the resultant inability to retain reasonable profit margins. This scenario is not unique to Astral’s poultry division and it’s clear the South African poultry industry is an industry in distress, as declared by the Department of Trade and Industry (dti). It is common knowledge that South Africa has applied for an increase in the customs duty on poultry – but this would not necessarily mean a rise in prices for the consumer, who does not directly benefit from low-priced imports.

Conclusion

Financial results do not always provide such a clear insight into the health of an industry, and it is easy to see why Astral is down in the dumps. Government is clearly sympathetic, but is trading warily when confronting BRICS partner Brazil. Meanwhile, the current free trade accord with the EU makes it difficult to tackle that source of cheap chicken. Astral may remain in the dumps for some time to come.

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Should Public Enterprises take over SABC and PetroSA?

If today’s Business Report is to be believed, Public Enterprises Minister Malusi Gigaba will add public broadcaster SABC and state oil company PetroSA to his portfolio, which already includes troubled SAA and Eskom. Is this much more than a shuffling of deckchairs on the Titanic, or can one minister succeed in delivering better results from two national embarrassments, which have been repeatedly the subject of scandal and mismanagement?

Expert views

1. Lavan Gopaul from 28E Capital:

The government has missed an opportunity to privatise these public enterprises. Successive managements and boards have resulted in an ungovernable set of institutions. Most of them have been just breaking even or making losses. We saw instances in the Thatcher regime in the UK when the privatisation of public enterprises led to job creation and profits for shareholders. When one considers the fate of the SABC, of Telkom and SAA, it’s clear the national government is not in a position to actively compete in an entrepreneurial space. The missed opportunities to privatise mean that South Africa loses out as a global operator.

2. Mike Schussler from economists.co.za:

Malusi Gigaba has been a powerful minister. One can expect him to bring a bit more stability to the SABC. PetroSA is also in a bit of a mess. You could argue that the SABC should be run by a trust, as a public broadcaster, independent of politics. Petro SA should be in private hands, although there is an argument that South Africa’s strategic oil reserves should remain under government control. PetroSA is active in Africa, in the same way as a private player, and should be regarded as such.

3. SACCI CEO Neren Rau:

We recently did a study of state-run enterprises, and there are enormous challenges in terms of their governance. That is a key thing that Minister Gigaba can contribute. We have seen Board members being replaced without being informed, and CEOs sometimes not being informed about changes in their Boards. He can improve relations between the shareholder and the entities, and improve the governance of these entities.

Conclusion

Clearly there is a problem with dysfunctional and poorly-run state enterprises, and the appointment of a well respected minister to oversee PetroSA and the SABC would be a step in the right direction. But it doesn’t address the more fundamental question of whether the State should be in charge at all. Of course, we need the right regulatory environment, but politicians and civil servants in South Africa do not have a proud record in overseeing businesses.

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The power of twitter

Today I offer some thoughts on the use of twitter by the irate consumer, based on two personal examples.

I have found the tweet an effective and speedy way of drawing attention to a problem, and in the case of a large organisation it enables the consumer to complain about a local outlet directly to the head office.

The first example was when I tweeted while leaving a branch of Massmart subsidiary Makro, where I had wanted to buy a cheap digital camera, but had been ignored by the one salesman on duty, who regarded his lengthy phone chat as far more important than the consumer in front of him.

A tweet mentioning the CEO of Massmart Grant Pattison received an almost immediate response, and Grant himself contacted me and tried to retain me as a customer, even though he was travelling elsewhere in Africa at the time.

And excellent and impressive response.

More recently, the service, or lack thereof, at my local Pick n Pay liquor store left me empty handed and fuming, so again I went on twitter, mentioning the supermarket chain.

Speedily I was contacted by the consumer relations people, and within 24 hours I had received a call from the store manager who explained the problems he was encountering, but promised to put things right.

I am not suggesting that we should bombard people with tweets mentioning trivial issues, but if like me you have left a store annoyed and frustrated, this may be one of the best ways of dealing with a problem, and getting in touch with those in a position to put things rights.

Companies do not want their brand soiled by poor service and peeved customers, and should listen when problems are raised in a public forum like twitter.

And on occasion it might also be worth sharing a truly impressive experience in a store – the next time you are able to leave the place in jubilation and delight.