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Limited prospects in South Africa?

World Coal,

Business Monitor International (BMI) analysts have expressed a downbeat view on South African economic prospects following a research trip to the country late last year. Banks, corporations and state-owned enterprises seems to share a similar view that South Africa faces years of slow growth and rising social tensions.

Infrastructure challenges rising

A 2 November accident at Eskom’s Majuba coal power plant necessitated frequent incidents of ‘load shedding’, which disrupted meetings and caused paralyzing traffic jams. BMI’s Power analysts believe that the South African electricity sector’s troubles show little sign of abating.

Transport infrastructure, while better than elsewhere in Africa, was also a frequent source of complaints. Many drivers have taken advantage of a four month postal strike to avoid paying Guateng’s unpopular road tolls. One client, who owed over ZAR20 000 (US$1806) in tolls, said she would gladly pay a fee for better rods, but has no faith that the money would not be wasted on ‘another house for the president’.

Mining sector faces structural decline

BMI’s generally negative view of the South African mining sector is widely shared, with clients in a variety of sectors seeing little reason for optimism. Rising wages, high cash costs – ageing mines require deeper and deeper excavation – and lower commodity prices are squeezing miners’ margins.

Figures from the BMI Mining team show that gold output has been falling since 1990 and that production of diamonds, platinum and coal peaked in 2007 and 2008. None of these sectors will see output reach their previous peak within the 2014 – 2018 forecast period.

Domestic coal output will remain just below the 2008 peak, but South Africa is also well positioned as an export hub for coal production in Botswana. Clients in the transport sector see exporting Botswana’s coal as a key source of growth.

Mining sector stagnant, social tensions rising

The social effects of weakness in a traditional economic driver are dire. Employment in the mining sector has been falling since 2012; the Q2 2014 figure of 490 000 was the lowest total since mi 2010. Poor performances in other sectors have led BMI to predict that South Africa’s unemployment rate will remain approximately 25% - among the highest in the world – to 2018.

This stagnation will likely lead to the increased radicalization of South Africa labour unions and politicians. Divisions within the government linked Congress of South Africa Trade Unions (Cosatu) – which culminated in the expulsion of a major mine workers’ union on 8 November – were widely seen as a sign that cracks are appearing in the country’s current political structure. Populist figures such as the Economic Freedom Fighters’ Julius Malema may prove able to tap into rising disaffection with the African National Congress (ANC) government, a prospect that clearly worried may in the business community.

Some positive signs

The pessimism of many is such that they are surprised that BMI holds any positive view on the country. One frequently discussed sector is renewable energy. South African Renewable Energy Independent Power Producer Procurement Programme, an auction system, has already attracted significant investment from foreign firms, including major European players like Vestas. BMI predicts that non-hydro renewable power generation will increase by 73% between 2014 and 2018.

Renewable power makes up less than 2% of total power generation, so this increase will not address South Africa’s structural power woes. Still, it is a sign that particular sectors can perform strongly even in the context of a weak growth picture, BMI highlights.

Looking further afield

Even so, most companies are clearly focusing their investment in the rest of sub-Saharan Africa (SSA). Even state owned firms are keen to increase their partnerships with neighbouring countries in order to gain exposure to faster growing markets.

Adapted from a report by Emma McAleavey.

Source: BMI

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