IF THIS commodity super-cycle is indeed coming to an end as Europe, US and China’s economic growth rates continue to slow, then a great many more South African miners will find life difficult, unless they are allowed some flexibility.
Iron ore, copper, platinum and other base metals have all cooled significantly over the past two years. Having done a great a job of slowing the world’s second-biggest economy because of inflation fears, the Chinese government is now struggling to boost it.
The ability to expand and contract is fundamental to any company’s survival when faced with swings in demand, but politically it’s becoming very touchy to talk about restraining output.
With SA’s unemployment close to 25% and its sluggish growth in comparison to emerging market peers, a cut in output comes with tremendous union, government and other stakeholder pressure.
These fault lines are being exposed to foreign and local investors by the Marikana tragedy in North West province. That’s why miners with operations in SA will struggle to attract capital.
At the height of the global financial crisis, bankers and traders in New York came to work fearing the pink slip. Faced with the biggest crisis since the thirties, the financial heart of the world’s biggest economy was shutting shop.
It’s a brutal job market and not one many South Africans or Europeans would be very comfortable with. The argument for such brutality is that downturns don’t necessarily have to last too long as companies can just as quickly rehire when the tide turns, providing an immediate boost to consumer confidence. (This argument works a whole lot better in a cyclical downturn rather than the structural one currently unfolding.)
But back to my point, this cut-throat US style rapid contraction and just-as-fast expansion allows companies to react sooner to changing market conditions. It’s this ability to react to change that allows companies to survive and to go through a trough and emerge as an employer again.
In SA, mines simply don’t have the flexibility to make tough decisions such as scaling back on output. Politically, it’s a touchy subject as you are dealing with potential job losses.
Mines can work around that by simply not replacing workers who leave or retire. That’s about an 8% annual reduction in the labour force for platinum mines.
But there’s no way around high wage demands that outstrip inflation, which come with the added threat of a prolonged strike.
For a company like Lonmin that simply can’t afford further production losses and wage demands, just how does it keep going?
The longer workers stay away from Marikana, the deeper in the red the company sinks, and the fewer options management, workers and unions have.
There has to be some flexibility in this sector of the economy if it is to survive in a world where we don’t have the magnificent rise in commodity prices seen over the past 10 years. The mines need some breathing space.
WE ALL know the threat of Europe, and the consequences if the old continent doesn’t manage to persuade investors that policy makers will in the end successfully manage its sovereign debt crisis.
Next month will prove a big month for Europe. It will either signal that the uncertainty is coming to an end or that we should just learn to deal with it for another year.
But if markets get a third round of quantitative easing, our anxieties may be allayed as we head towards the end of the year, where something possibly much more dangerous awaits. That is the "fiscal cliff" in the US. The means a compulsory increase in taxes and cuts in government spending to the tune of $600bn will come into effect.
The demand sucked out of the world’s biggest economy could cut as much as 2%-4% off its gross domestic product next year.
If the US jumps off that cliff because of the fierce battle between Democrats and Republicans, then it will take global growth with it, and most of the world’s economies into another deep recession.
If you are right to believe that the American political system is designed for compromise with no single party or idea ever getting their way, then perhaps we shouldn’t be too worried.
But seeing the animosity between the Republicans and Democrats, the fear won’t grow less that a division between the US presidency and the House of Representatives may make finding any agreement on the tax cuts all the more difficult.