Month: September 2014

Acsa could put Eskom on the right path

This piece was published in the Business Day on 22 September 2014:

THE Treasury’s package of measures for dealing with Eskom is like the curate’s egg — it is good in parts. The Treasury has devised a package of measures to sustain Eskom. Some will be welcomed, others not. Unfortunately, the government, sole shareholder of this failing corporation, is not willing to recapitalise Eskom fully so it can complete its build programme without further harm to hard-pressed electricity users. Continue reading Acsa could put Eskom on the right path

National Treasury and Eskom: The curate’s egg

National Treasury’s package of measures for dealing with Eskom is another case of the curate’s egg – it is only good in parts.

The Treasury has come up with a package of measures to sustain Eskom. Some of these measures will be welcome, others less so. Unfortunately the government, the sole shareholder of this failing corporation, is not willing to fully recapitalise Eskom so that it can complete its current programme without further damage to the hardpressed users of electricity – firms and households. Continue reading National Treasury and Eskom: The curate’s egg

Developed or emerging markets? The JSE offers easy access to both

The JSE All Share Index, when converted into US dollars at current rates of exchange consistently tracks the benchmark MSCI Emerging Market (EM) Index, making the JSE a very good proxy for the average EM equity market.

This relationship, as we have often pointed out, is not co-incidental. It is the very similar earnings performance of the average JSE-listed company compared to that of the average EM company that presumably explains the closeness of the fit. We show below how closely the two earnings per index share series compare. Continue reading Developed or emerging markets? The JSE offers easy access to both

National income accounts: Demand side reality check

There is even less comfort than before from the demand side of the SA economy – calling urgently for an economic reality check

 

The national income accounts for Q2 2014 now include the aggregate expenditure estimates and these make for very uncomfortable reading. These estimates of expenditure make it clear that SA has a serious demand side as well as a supply side problem.

 

The Reserve Bank confirmed that growth in spending by households, firms and the government is slowing down and may shrink further in the quarters to come.  Estimates of expenditure for Q2 2014 reveal that final demands for goods and services, adjusted for higher prices, slowed to a 1.3% annual rate in Q2 2014, down from a still weak 2.9% rate in 2013. Spending by households slowed to a paltry 1.5% rate. Growth in spending on plant and equipment also slowed down, to a half a percent crawl as private businesses reduced rather than extended productive capacity. Private formal businesses not only reduced their capital stock, they also employed fewer workers in Q2 2014.

Continue reading National income accounts: Demand side reality check

Emerging markets: On the comeback trail?

Emerging and developed equity markets this year are tracking each other rather closely. As we show in the chart below, this has not always been the case.

Between 1990 and 1995, emerging market (EM) equities made their first significant bow on the global capital market stage and outperformed the US S&P 500, the leading developed market benchmark, by some 80%. After 1995 and until 2000, they lost all of this ground gained and much more in relative performance. EM was again the preferred flavour after 2000 until the Global Financial Crisis, an event that took even more out of EM valuations than the out of the S&P and other developed equity Indexes. EM, then in recovery from the global recession, outperformed the S&P 500 until 2010, but then became a decided outperformer until this year. Continue reading Emerging markets: On the comeback trail?

Woolworths: Why the share market did not react (much) to the rights issue

What really matters for shareholders is the decision to invest in David Jones – much more than the funding choices made.

The Woolworths (WHL) rights issue designed to finance its takeover of Australian Department Store David Jones has been in the wings for some time. Despite the prospect of more shares in issue and dilution to come, the share market correctly has not yet reduced the price of a WHL share. Continue reading Woolworths: Why the share market did not react (much) to the rights issue

Point of View: There’s not so much gold in them thar hills

The front page of the Wall Street Journal this week (25 August) carried a story about South Africa leading the world – in illegal gold digging. To quote the report “Dangerous Economy Thrives in South Africa’s Abandoned Gold Mines” by Devon Maylie:

“After years of watching its dominance over the gold industry shrink dramatically, South Africa has emerged as the world capital of illegal gold digging. In staggering numbers—easily into the tens of thousands—desperate former miners and gang members have created a subterranean subculture of abandoned mine-shaft wanderers. Armed with a few crude tools, they dig into blasted or cement-sealed mines, comb through tunnels, and spend days chiseling away at bedrock.
“Once the world’s biggest gold producer, South Africa accounted for 80% of the global supplies as recently as 1970. Today, that figure is less than 1%, in large part because China and other countries have sharply picked up their own production, forcing mine closures here that created an opening for freelancers. Today, some 4,400 abandoned mines dot the countryside, almost four times the number in operation, according to South Africa’s Council for Geoscience. And while there are still about 150,000 formally employed gold miners in South Africa, ‘we’re very close to the point where there will be more illegal miners than legal miners,’ says Anthony Turton, a South African mining consultant.”

The Journal continued:

“… taken together, the output of these swelling ranks are having a noticeable affect on the bottom-line of the country’s sagging mining industry and tax revenues. South Africa’s Chamber of Mines, a body that represents mining companies, estimates that the country loses about 5% of its potential annual mineral output to illegal mining activities, equivalent to around $2 billion. In 2010, the most recent year available, the government estimated losing $500 million in tax and export revenue from gold illegally mined and sold in the black market, compared with about $2 billion it raises annually in corporate taxes from all mining companies.”

A few caveats are perhaps in order here. In 2012 the the Chamber of Mines reported gold production of 167 metric tonnes, or 5.8% of world production that year, well down on output and share of global production in 2003, as illustrated below:

The member companies of the Chamber did much better in extracting gold bearing ore from their mines than in extracting gold as the second table shows. The tonnes of gold-bearing rock they milled actually increased in recent years. What has declined precipitously is the average amount of gold contained in each tonne of ore raised to the surface. Each tonne of rock extracted, expensively and dangerously, from the bowels of the earth now contain a miniscule average 2.9 grams per metric tonne. The loss of SA’s share in global mine production has much more to do with declining grades (from 4.56 grams per tonne in 2003) than it has to do with increased output elsewhere. Global gold output has increased by approximately 230 tones since 2003, while production from all SA mines fell by 208.6 tonnes over the same period. In other words, production outside SA has increased by a little more than SA production has declined.

An important further point worth making is that annual production of gold is a very small proportion of the gold ever produced. Almost all of this has survived and is held as a store of wealth. Therefore, as is surely apparent, the price of gold is little affected by current output – legal or illegal. The legitimate mines may lose potential output to thieves and the SA government is not able to collect income from illegal or informal miners, while the price is unaffected by illegal mining activity – equivalent to 5% to 10% of the legal production. Furthermore, if the gold has been extracted illegally from shafts that have been permanently abandoned, such output is incremental, not lost. The gold would have stayed in the ground and not helped produce any income at all. The costs of mining this otherwise abandoned gold is borne entirely by the workers themselves, including the risks of losing their lives to rock falls and their gold to gangsters preying on them.

Incidentally, the gold produced in SA in 2012 earned R73bn, well up from the R32.9bn realised in 2003 thanks to the higher rand gold price. 5% – 10% of this attributed to illegal gold miners is significantly more than the R2bn worth of illegal mining revenues reported by the WSJ and does not take account of other mining sales that altogether totaled R363.8bn in 2012. Such illegal mining activity, currently largely unrecorded, could add significantly to the SA GDP were it to be included in the national income accounts.

Yet while the recorded output of gold has declined and the numbers employed in gold mining has fallen from 198 465 employees in 2003 to 142 201 in 2012, average earnings of these workers have improved significantly over the same period. Total gold mining earnings amounted to R22.24bn in 2012 or R156 386 per employee, compared to approximately R63 900 earned by the average worker in 2003, or to R103 000 in 2012 (the equivalent when adjusted for CPI). In other words, the average employee in the gold mining industry, of whom there are now fewer, appears to be earning about 48% more in CPI adjusted terms in 2012 than they did in 2003.

These improved remuneration and employment trends are unlikely to be independent. The fewer surviving gold mine workers have become more productive, helped no doubt by more and better equipment per worker, judged by the volume of ore extracted rather than the gold produced. The industry would not have survived otherwise than by providing fewer jobs in exchange for what have become better paid and more productive workers. Operating margins for the Chamber member mines have improved rather than deteriorated over the years, as we show below, despite lower grades of gold mining ore.

The safety record of the industry, judged by fatality rates, has also improved as we show below. Thus the industry has provided better and safer jobs, but for regrettably fewer workers.

As the WSJ makes only too clear, the willingness of the illegal miners to undertake the hazardous and poorly remunerated work they engage in has much to do with the lack of alternative employment opportunities. To quote the article again:

”’If I could find a proper job, I would leave this,’” says Albert Khoza, 27, who says he started illegal prospecting eight years ago because he couldn’t find work and was desperate to send money to his family. On this day, outside an old mine about 60 miles from where Mr. Matjila mines, he has been handling mercury with his bare hands. His eyes are bloodshot and infected, as he stokes the fire with plastic containers”.

Or, as the other illegal miner interviewed, Mr. Matjila, is reported to have said: “’We’re not criminals, I don’t want to be doing this. But I need to make some money.’ Then he stood up to walk down the road to the hardware store to check on prices of new supplies. ‘We have to make a plan to find another hammer,’ he says.

The challenge to the SA economy is to resolve the inevitable trade-offs between better jobs for some workers and the very poor alternatives then open to those who are unable to gain access to what is described as ”decent jobs”. The formal SA labour market has not been allowed to match the supply of and demand for labour at anything like market-clearing employment benefits. And so we have the insiders, those with formal employment and willing to launch strike action to further improve their conditions of employment; and the outsiders who find it so difficult to gain entry to formal employment, of whom the illegal miners represent a numerically important group, as numerous, so we are told, as those formally employed in gold mining.

The solution to the general lack of formal employment opportunities appears as far away as ever. Strike action not only leads to higher real wages and reduced employment opportunities, but still greater incentives to substitute reliable machinery for more expensive and unreliable labour that makes continuous production very difficult to achieve. The unpredictable impact of strikes on production is perhaps as much an incentive to reduce complements of relatively unskilled workers as are higher real costs of their employment.

To encourage employment in the gold mining industry and everywhere else, it would be very helpful if workers were willing to share in the risks of production, as the illegal miners appear willing to do: that is to accept less by way of guaranteed pay and more by way of rewards linked to performance and profits. In other words, for workers to become, to a greater degree, owners of the enterprises they engage with. If pay went up and down with the gold price, the gold mining industry would surely be willing to bear the risks of hiring more workers.