SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER

UNCLAS SECTION 01 OF 05 PRETORIA 000162 SIPDIS DEPT FOR AF/S/MTABLER-STONE; AF/EPS; EB/IFD/OMA USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND TREASURY FOR TRINA RAND USTR FOR COLEMAN SIPDIS E.O. 12958: N/A TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB, SENV, PGOV, SF SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER JANUARY 25, 2008 ISSUE PRETORIA 00000162 001.2 OF 005 ¶1. (U) Summary. This is Volume 8, issue 4 of U.S. Embassy Pretoria's South Africa Economic News Weekly Newsletter. Topics of this week's newsletter are: - Turmoil in Markets Threatens Growth - SAG Inflation Targeting Policy Questioned - Fixed-Investment Outlook Strong for 2008 - Saudi-based Group to Invest in Telkom SA - Freight Transport Rate Hikes Outpace Inflation - BHP Billiton's Oil Search Stymied - China's Gold Output Surpasses South Africa - Mining Industry Considers Backup Power Supplies - Power Shortages Impact Mining Expansion - Civil Aviation Authority Revises Recruitment Strategy End Summary. -------------- Turmoil in Markets Threatens Growth -------------- ¶2. (U) Turmoil in currency and equities markets has complicated the job of the South African Reserve Bank when it considers next week whether to change the interest rate policy. While a slide in the Rand is set to push inflation up, a rout on the Johannesburg Stock Exchange and a deepening power crisis threaten to curb economic growth. "There are more reasons today for the Reserve Bank to consider leaving interest rates on hold, although there has been nothing but bad news in terms of inflation," said ABSA Capital chief economist Jeff Gable, adding, "The fundamental question for the Bank now is how to balance a miserable inflation message with growing signs of a meaningful slowing in consumer demand and concern over the broader economy." The Rand had plunged more than 8% in the past week alone, an ominous sign of inflation to come, but recovered partially after the U.S. Federal Reserve cut interest rates by 75- basis-points on January 22. (Business Day, January 23, 2008) -------------- SAG Inflation Targeting Policy Questioned -------------- ¶3. (U) SACP Deputy General Secretary and newly elected National Working Committee (NWC) member Jeremy Cronin stated that inflation targeting, a key government anti-inflation policy, "is wrong". Cronin added that there was a feeling in the tripartite alliance that South Africa should follow the example of South Korea, which had "manipulated" interest rates according to industrial policy and "strategic objectives". Many analysts believe that this would be the wrong time to question the government's anti-inflation efforts, as interest rates have been above the Department of Treasury's 3-6% inflation targeting band for nine consecutive months. It would also send the wrong signal to bond and equity markets, which will be needed to continue to finance South Africa's large and growing current account deficit, and would have a negative effect on the country's exchange rate and sovereign credit rating. However, other analysts believe that the inflation targeting band of 3-6 percent has caused the South African Reserve Bank to hike interest rates unduly in the face of inflation fueled by international fuel and food prices, rather than demand pressures. (Business Report, January 15, 2008) -------------- Fixed-Investment Outlook Strong for 2008 -------------- Q -------------- ¶4. (U) First National Bank Chief Economist Cees Bruggemans said electricity, transport, communications and mining are expected to be the main drivers of real PRETORIA 00000162 002.2 OF 005 fixed-investment growth in 2008. He expected fixed- investment growth of 13%-16% in 2008. Bruggemans said public corporations would show the fastest increases, but government and private business should continue to expand steadily as well. He added that the fixed investment to gross domestic product (GDP) ratio is expected to top 25% by 2010. According to the December 2007 South African Reserve Bank quarterly bulletin, real fixed-investment spending rose 16% in the first three quarters of 2007 and reached 21.2% of GDP in the third quarter. Public corporations increased their real fixed investment 32% y/y in 2007. Bruggemans indicated that a "bulk of this effort went into infrastructure creation," with more than 50% of investment spending focused on construction, 35% on machinery and equipment, 10% on transport equipment and only 2% on nonresidential buildings. In contrast, government investment growth was much slower, with 13% y/y fixed investment growth in 2007, but this was a great improvement over 2006, when a decline of 0.5% y/y occurred. (Business Day, January 22, 2008) -------------- Saudi-based Group to Invest in Telkom SA -------------- ¶5. (U) Saudi-based Oger Telecom plans to buy into South African fixed-line operator Telkom SA. Oger CEO Paul Doany told reporters it will use some of the $2.6 billion it earned from the sale of a stake in Saudi Telecom to invest in Telkom SA. Oger already has a majority stake in unlisted Cell C, South Africa's third-largest mobile operator. Doany did not specify the size of the offer but said about $830 million will be paid to shareholders as a dividend. Telkom SA issued a statement stating it would consider the "nonbinding expression of interest" from Oger Telecom, along with other alternative options to enhance its converged fixed and mobile services. The bid comes in the wake of aborted talks for Telkom SA to sell part of its 50% stake in Vodacom, South Africa's largest mobile operator, to the U.K.'s Vodafone, which already owns the other half. That was cancelled when Telkom failed to agree a tie-up with MTN, which would have filled the gap created by selling its Vodacom mobile assets. MTN is the largest mobile operator in sub- Saharan Africa. (Business Day, January 23, 2008) -------------- - Freight Transport Rate Hikes Outpace Inflation -------------- - ¶6. (U) Transnet Freight Rail is the latest state utility to announce above-inflation tariff increases. The new freight tariffs will take effect from April 2008 increasing freight rail prices by 16.5%-22%. The price on a consignment of 10 wagons or more will go up 16.5% y/y, while the increase for consignments of fewer than 10 wagons will be 19.5% y/y. Transnet Freight Rail also announced that charges on some routes would go up 22% y/y, irrespective of consignment sizes. While the utility did not specify which routes, Chamber of Mining Executive Director Jannie de Villiers said they were likely to be those serving rural and agricultural areas, which means the cost of shipping agricultural products to market would Qcost of shipping agricultural products to market would increase significantly and push up food prices. Transnet Freight Rail wants to increase its market share from about 10% to 30% in the next five years. A large chunk of the Transnet group's capital spending of R78 billion ($11 billion) over the next five years will go to upgrading rail operations. (Business Day, January 18, 2008) -------------- BHP Billiton's Oil Search Stymied -------------- ¶7. (U) BHP Billiton, the operator of two potential PRETORIA 00000162 003.2 OF 005 petroleum-producing blocks off South Africa's west coast, has reached an impasse with the government over the conversion of its exploration leases to new-order mining rights. A key obstacle is related to the Department of Mining and Energy's (DME) insistence that local courts arbitrate in disputes, rather than international arbitration courts as expected by international oil companies. BHP Billiton's old-order sub-leases are believed to include "stability clauses" and access to international arbitration and the government appears to be using the conversion requirement to remove these rights. Another oil producer, U.S.-based Pioneer Natural Resources, said other operators in the local petroleum exploration sector faced similar problems, but "Pioneer had reached an accommodation to make our situation work." Other operators have greater incentive than BHP to agree to the government's terms because they have already invested significantly in drilling. Forest International, the U.S.-based operator of the Ibhubesi gas field off the west coast, is expected to have new- order production rights for its acreage issued this year. A Business Report editorial opined that the "state's stubborn petroleum policy may need oiling." It noted that BHP Billiton was holding off on exploration apparently due to fears of uncertainty over royalties, as well as rights to international arbitration. The editorial concludes: "Given the uncertain environment and the fact that South Africa's undersea geology is not as enticing as Angola's, it is perhaps not surprising that no new players have invested in our off-shore petroleum reserves in the last five years." (Business Report, January 16, 2008) -------------- China's Gold Output Surpasses South Africa -------------- ¶8. (U) China overtook South Africa as the world's largest gold producer in 2007, according to the Gold Survey 2007 from the precious metals consultancy GFMS. South Africa had held the accolade since 1905, but its output has been in steady decline since it reached a peak of 1,000 tons in 1970. China's move to the top spot comes after strong, continued growth in recent years, while gold production in South Africa has continued to decline. South Africa's declining production means it is losing out on potential foreign earnings and employment opportunities as the gold price has picked up in the past few years, touching a record of $914/oz this week. Latest data from Statistics South Africa for the year to November showed South Africa's gold production fell 12.7% compared with the same period in 2006 because of safety-related mine shaft closures. GFMS reported that South Africa's production for the whole of 2007 declined 8.1% y/y to 272 tons while China's increased 12% y/y to 276 tons. GFMS said gold production was affected by the increasingly difficult operating environment in South Africa. Competition for consumables, labor and key plant items hampered project development. Globally, gold production fell 1%, but GFMS forecast it would grow about 2% in the first half of 2008. GFMS estimated that gold prices Qfirst half of 2008. GFMS estimated that gold prices could average $840/oz in the first half of 2008 and could be even higher in the second half. (Business Day, January 18, 2008 and Mining Weekly, January 17, 2008) -------------- -- Mining Industry Considers Backup Power Supplies -------------- -- ¶9. (U) The South African mining industry has received assurances from Eskom for priority service during power shortages, but is struggling to reduce power consumption. The companies are all "load-shedding" but there are certain activities, such as ventilation and transporting workers and equipment, for which PRETORIA 00000162 004.2 OF 005 there is limited room for further reductions due to safety concerns. Although producers have not yet had to incur any additional costs for backup power, some are considering options for backup supplies. However, one producer, Simmer & Jack, said the cost of traditional backup options was prohibitive. For example, operating standby diesel generators costs about 6 to 10 times as much as power supplied by Eskom, which is why they are used only in emergencies. Harmony Gold Mining, which uses about 460 megavolt amperes (MVA) at peak periods, said it was in partnership with another company to pursue an Eskom co-generation project. This would entail building seven generating stations at Harmony's operations with a total capacity of 300 MVA. Gold Fields was buying additional emergency capacity to supply its existing backup, it said. AngloGold Ashanti installed backup power units 20 years ago, which could evacuate a peak shift of underground workers. (Business Day, January 22, 2008) -------------- Power Shortages Impact Mining Expansion -------------- ¶10. (U) South Africa's main gold and platinum mines have secured enough power to keep their expansion projects moving for the next two or three years, but beyond 2010 they can not be certain of their electricity supplies. Gold Fields, Harmony Gold Mining and Simmer & Jack are extending existing operations or reopening mines where the electricity infrastructure is already in place, so they are not shelving any announced capital projects. However, there is concern that "Eskom cannot provide quotations for the increased capacity required beyond 2010 until they finalize their policy on allocating new capacity in this period of shortage." A Simmer & Jack spokeswoman said its projects at Buffelsfontein, Hartbeestfontein and Ezulwini were in areas that historically had been very large consumers of electricity. An AngloGold Ashanti spokeswoman reported: "The big projects that require additional power are only scheduled to come into full production after 2010. This is not due to the energy situation, but they have long lead times for sinking operations." A BHP Billiton spokeswoman said the group could not expand its Hillside and Mozal smelters unless it could secure enough power at internationally competitive prices. Anglo Platinum said its current expansion projects will increase its electricity consumption by 50% by 2013, but did not say it would defer any of its capital projects. Platinum producer Lonmin announced that electricity problems would not alter its expansion plans, including the development of Akanani after 2012. (Business Day, January 22, 2008) -------------- -------------- Civil Aviation Authority Revises Recruitment Strategy -------------- -------------- ¶11. (U) Civil Aviation Authority (CAA) CEO/Commissioner Colin Jordaan told the press that CAA is revising its strategy to recruit additional aviation inspectors. Jordaan originally hoped to recruit about 40 inspectors from a group of experienced pilots that South African Airlines (SAA) Qexperienced pilots that South African Airlines (SAA) was planning to retrench. However, many of these SAA pilots have received and accepted offers from expanding airlines in the Middle East. To respond to short-term needs, Jordaan is planning instead on recruiting experienced pilots who are close to retirement from other South African local airlines, including Nationwide and British Airways/Comair. Jordaan expressed hope that a new South African regulation that reduces the age at which student licenses are granted from 18 to 16 years will increase the pool of trained pilots in the long-term. He reported that similar reductions have been in place in PRETORIA 00000162 005.2 OF 005 many other countries and it is seen to be a safe measure. Both SAA and British Airways/Comair offer training programs for a limited number of student pilots. (Business Report, January 18, 2008) BOST