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Load shedding, the strike at Transnet, and oil price increases will have a dramatic effect on South Africa’s economic prospects soon, and the country’s external trade dynamics will be especially hard-hit, while the strike can also affect coal supply to power stations, potentially leading to worse bouts of load shedding.
According to the Bureau of Economic Research (BER) at Stellenbosch University, the resumption of load shedding, although at a less intense level, adds further strain to the near-term prospects for the economy.
However, the BER says, there is also the worrying development over the last week of the open-ended strike at Transnet.
“The logistics utility claims the strike is illegal and declared force majeure (meaning it is unable to meet contractual obligations due to a major unforeseen event) on Thursday. This was the fourth force majeure declared in just over a year.”
While a protracted Transnet strike would hurt exports, thermal coal miner Thungela Resources said it would negatively impact its production if the strike continues for longer than two weeks. The BER says the strike is adding to the constraints on the country’s export abilities, with Transnet’s major bulk commodity export rail lines operating well below capacity for some time.
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Roger Baxter, CEO of the Minerals Council, argued at last week’s Joburg Mining Indaba that if the rail network was operating at proper capacity, the mining sector would have exported an additional R35 billion worth of minerals in 2021.
He said so far in 2022, the ineffectiveness of the rail system and ports cost the sector another R50 billion of lost export revenue as SA cannot fully benefit from surging prices for some key export commodities, mainly coal.
The BER says to put this in perspective, the lost revenue is about 0.7% of SA’s nominal gross domestic product (GDP).
“A rise in commodity export volumes would not only have a profound positive impact on our trade balance, but also boost mining production, employment and investment prospects in the sector, while South Africa’s fiscus would also have benefitted significantly.”
In addition, the Transnet strike increases the risk of intensified load shedding as it could undermine coal deliveries to power stations that receive coal via rail, while agricultural exports are also set to be badly hurt by a strike.
The BER says a possible strike in the automotive industry would have a similar negative impact and outside the industrial sectors of the economy, the public sector may also be hit by a wage strike.
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Further bad news for South Africa’s trade account comes from last week’s oil price after oil grouping OPEC+ announced a deep production cut of 2 million barrels per day, starting in November. The cut is roughly equivalent to 2% of global consumption.
“Although the actual cut is likely to be less as many OPEC+ members are currently producing below target, the implications of the announcement are far reaching from a geopolitical perspective. Most notably, it goes straight against recent pleas from US President Joe Biden to leading OPEC member Saudi Arabia, in particular, to boost oil output and works against the US releases of strategic oil reserves aimed to push prices lower.”
According to the BER, the aggressive stance by OPEC+ also reflects a tighter bond between oil giants Russia and Saudi Arabia, with the cartel arguing that the production cut is necessary to prevent a collapse in the oil price similar to 2008 amid slower global growth.
The oil price surged following the announcement, with the one-month future up more than 11% w-o-w to trade just a few dollars below $100/barrel. The BER says more oil price pain is expected as European sanctions on Russian oil sales are only kicking in later this year.
“Given South Africa’s diminished refinery capacity, after surging higher in the second quarter of 2022, the cost of refined oil imports is set to remain elevated, especially amid a weaker rand exchange rate.”
The rand slid marginally further against the three major currencies last week.
Positive news was that local bonds had a better week and moved down from recent highs to close at a two-week low on Friday.
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The negative news follows the seasonally adjusted Absa purchasing managers’ index (PMI) that reverted to contraction territory in September as manufacturers succumbed to persistent load shedding at high stages.
“The PMI results do not bode well for a strong recovery in actual manufacturing production from a bleak second quarter in 2022. That said, manufacturing production should post modest annual growth in the third quarter after output was negatively affected by relatively strict lockdown restrictions and the looting and civil unrest in July 2021,” the BER says.
The S&P global SA PMI, which tracks activity across the private sector in the economy, also saw its headline index decline to 49.2 in September from 51.7 in August. This was the first contraction since December 2021 and was also linked to load shedding hurting output and demand.
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The only bright note was new vehicle sales that showed a 10.8% increase in September compared to September 2021. The BER says this solid performance was mainly due to robust passenger car sales, which rose by 9.7% compared to last year and 3.8% compared to August, supported by the car rental industry.
According to the BER the latest data suggests that agencies have started to restock their fleets as the tourism sector starts to benefit from full-on reopening effects post-Covid.
Sales also soared on the export front, registering a 104.6% increase compared to a low base in September 2021, when exports were affected by the Transnet cyberattack.
The January to September export sales is now 14.4% higher than the same period last year, but if the vehicle sales data is seasonally adjusted, the figures show a quarter-on-quarter contraction in domestic sales and exports during the third quarter.
The SA Reserve Bank has also announced that gross reserves slipped to $58.9 billion in September from $59.8 billion in August, mainly due to lower gold reserves. However, gross reserves grew by 3.2% in September on an annual basis.
Stats SA will release the manufacturing and mining production data for August this week. The BER says with significantly less load shedding in August relative to July and a continued recovery from second quarter shocks, both are expected to look better relative to July.
Data Stats SA released last week showed that seasonally adjusted electricity output increased notably by 5.5% month-on-month in August, but this is expected to fall back sharply again in September.
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