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Obstacles constrain SA metals boost
Howard Preece
Posted: Wed, 13 Sep 2006
[miningmx.com] -- TWO seeming contradictions have been central to the South African economy over the past three to four years. These are:
Media headlines, globally and locally, have proclaimed almost daily a massive surge in nearly all commodity prices.
Metals and minerals account for well over 50% - more than 60%, at least, when secondary value-added sectors such as vehicles are included - of South Africa's total exports.
So that would apparently point towards a surging increase in the value of this country's foreign sales. But the reality over that period is that there's actually been a huge deterioration in South Africa's balance of trade - the difference between import and export values.
A key reason is the continuing rundown of the gold industry. Annual output slid from 424 tons on 1999 to 298 tons last year - and there was a further drop of 11% over January-June this year.
On a wider scope, many analysts and mining managers believe that South Africa has lost out considerably on the export side due to a mix of reasons. These particularly include infrastructure shortcoming at ports and railways and inadequate new fixed investment due to the uncertainties in the industry over licensing, charters and other essentially socio-political "red tape" issues.
Jac Laubscher, chief economist at Sanlam, says: "Even excluding gold, South Africa's export volume growth rate of 4.5% annually between 1996 and 2005 doesn't compare favourably with the 6.7% rise in global trade over the same period. The deficiencies in South Africa's transport structure have also hampered higher exports of commodities such as iron ore and coal, among others."
Also, Laubscher reminds, there was virtually no change in the real effective exchange rate of the rand in 2005 against 1996.
The surge in South African imports is much simpler. This country has an exceptionally high "marginal propensity to import". When consumers are flush with cash they spend a high proportion of their additional spending on goods and services from overseas.
Further, an economic upswing usually boosts new fixed investment, which mostly also has a hefty import content. Look at South Africa's growth in gross capital formation, as the SA Reserve Bank now calls it, over the past five years.
Then consider the turbo acceleration of the prime engine of growth in real gross domestic product - consumption expenditure by households (CEH).
It's obviously no surprise with the growth in consumption and capital formation spending that imports have been flooding into South Africa.
However, what's puzzling is why South Africa's export performance has been so lacklustre when commodity prices have generally shown rapid rises. That's why South Africa's negative trade balance - and the wider deficit on the current account of the balance of payments - has soared. For calendar 2005 the shortfall was R64,4bn. It was R98,9bn (annualised) in first-half 2006.
Click on image to enlarge
Cees Bruggemans, chief economist at First National Bank, notes: "South African export volumes have hardly risen in the past six years. Whereas GDP today is 25% higher in real terms than in early 2000, total export volumes have risen by only 7% over this six-year period. Imports increased by nearly 55% in that time."
But Bruggemans adds that South Africa has had significant benefits from higher commodity prices. Those are reflected in increased export values - gains in the "terms of trade", with the oil price import negative. Export prices rose 15% faster than import prices in the relevant period.
Clearly, though, that was nowhere near sufficient to prevent a severe worsening of South Africa's trade balance gathering pace. The 2006 Annual Economic Report from the Bank, published in late August, comments:
"South Africa exports benefited from strong global demand in 2005. The increase was concentrated in mining, where platinum group metals were the largest export earner, followed by gold - historically the most important - and coal."
The report continued, critically: "Export volume growth in mining was held back by an increase in the external value of the rand, the long lags involved in adjusting the capacity of the transport infrastructure to the buoyant global demand for commodities, industrial action, the regulatory environment with its compliance processes and decision-making and investment lags of the industry itself."
The Bank continued: "The volume of South African manufacturing exports remained under pressure in the second half of 2005 and moved sideways in the first half of 2006."
What South Africa patently needs is fewer growth plans on paper and more incentives - and/or less obstacles - for companies to get on and export a lot more in practice.
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