Recent data highlights ongoing slump in south african industry activity – ishares msci south africa etf (nysearca eza) seeking alpha j gastroenterol hepatol impact factor


In this article, we will take a look at the most recent economic data covering the South African ( EZA) economy, specifically referencing the supply-side or production side of the economy. As we have detailed in prior articles, a mix of structural constraints ( most notably as it pertains to the country’s state-owned electricity company), as well as an ongoing and worsening policy disconnect, are severely damaging the country’s supply-side and key export sectors.

This dynamic was once again in evidence following disappointing mining and manufacturing output for March, which points to a likely contraction in these sectors when GDP data for the first quarter of 2018 is released in coming weeks. Manufacturing production contracted by 1.3% y/y in March, the first y/y contraction since September last year, something which, in the context of the still robust global growth backdrop, should be deeply concerning.

It’s possible that the timing of the Easter Holidays (end March vs. April last year) may have played a role in the disappointing figures for March (although m/m output in March was actually up 1.3%), and if this is the case, we should expect something of a rebound in April. However, the data for January and February has been equally disappointing, and on a q/q basis, output in both the manufacturing and mining sectors contracted in Q1 2018, which will detract from overall GDP growth.

The data covering the mining sector was perhaps even more disappointing, given that commodity prices in general have remained quite elevated amid the backdrop of stronger global economy. Mining output contracted by 3.4% m/m in March while plummeting by 8.4% y/y. The "Easter" effect is probably more relevant in the case of the mining data. However, looking at the historical trend, we can see that overall production volumes in the mining sector have remained largely flat over the past five years, a reflection of the severe domestic headwinds faced by this sector.

The mining and manufacturing sectors account for around 20% of overall GDP, making it difficult for the overall economy to post stronger growth without a sustained recovery in these two sectors. More importantly, the mining sector remains vital in terms of the country’s export performance with mineral exports accounting for around 60% of total exports. As the chart below shows, due to the structural malaise in the country and apparent demise in demand for platinum (roughly 20% of total mineral exports), mining output volumes are actually lower now than what they were between 2003 and 2007.

Further to this, recent trade union demands, as well as current and likely future electricity tariff increases, pose a continued risk to output volumes going forward, particularly in the precious metals sector, where the mines are more energy-intensive in terms of electricity consumption (given the depth at which they mine). Results for the first-half of 2018 are likely to confirm the further deterioration in operating results for several of the more marginal mining companies, something perhaps already being flagged in the continued collapse in the share prices of these same companies.

The chart below reflects the recent performance of Impala Platinum ( OTCQX:IMPUY), the country’s second largest platinum miner and refiner, with the share price nearing the price levels reached during the depth of the commodity bear market at the end of 2015 (which at the time was the lowest price in at least two decades)

This performance is in the context of a USD-denominated platinum price that has remained largely unchanged over the past year, highlighting the erosion of margins in the sector due to persistent cost inflation and the appreciation of the Rand since 2016.

In summary, the country’s supply side and, in particular, the mining industry, remains mired in a deep structural crisis and will continue to act as a drag on the overall economy, as well as employment in the absence of a marked improvement in Rand-denominated product prices. Given that USD-denominated commodity prices may be approaching a cyclical peak (as global rates rise in coming months leading to a possible moderation in global growth), this adjustment or improvement will probably need to come from a devaluation in the Rand.

In this context, and with South Africa‘s trade balance likely to revert to a deficit this year as oil imports jump leading to a renewed widening in the current account deficit, there remains considerable and significant downside to the Rand from current levels. To make matters worse, the improvement in terms of trade observed in 2016 and early 2017 where industrial commodities (copper, iron ore, coal) outperformed oil prices, is also now reversing.

Quite possibly, the next three years (particularly given the evolving geopolitical risks in the Middle East) may see a marked deterioration in the country’s relative terms of trade based on the mineral commodities South Africa exports verse those that the county imports. South Africa imports about 200mn barrels of oil and refined products per year. We are referencing the source which only shows data to 2012, but these numbers (given the slump in the mining sector, which is a consumer of diesel for opencast mining operations) are likely to be more or less accurate even now.