Poor data make rates a tough call

Slew of indices point to stagnant economy while rand has tanked

THE South African Reserve Bank’s last meeting of the year is expected to be one of its toughest as the monetary policy committee is confronted by challenges of a rand in free fall and data that point to a withering economy.

Mining production figures out yesterday showed a shocking decline of almost 10% in the third quarter. It was its second quarter of contraction, dragging down gross domestic product growth.

Although that contraction supports the case for unchanged interest rates next week, better manufacturing production figures — after a contraction in the second quarter — rising inflation and a weak rand are among data supporting a rate hike.

The entire economy shrank in the second quarter.

Although mining is about 8% of the economy, any contraction offers good reason for the Bank to pause its hiking cycle.

The last hike of 25 basis points to 6% was in July.

Nedbank economist Johannes Khosa said that although the outlook remained weak, the Bank was still likely to raise rates by 25 basis points because of rising inflation, the rand’s recent plunge and the threat of surging food prices due to the severe drought.

Retail and wholesale sales data out next week will give a further indication of economic performance.

Stagnant demand, safety stoppages, plunging commodity prices and higher costs for labour and electricity were some of the reasons for the contraction in mining — and the trend is likely to persist.

A weaker rand affected the cost of imported equipment.

These tough conditions have forced mining companies to cut output and retrench workers.

The mining sector would remain under severe pressure until restructuring efforts or market conditions improved, said Monique Mathys, economist at the Chamber of Mines.

SA will also be affected by lower demand in China, which is the biggest market for mining exports.

Most mines were losing money and often the more they produced, the more they lost, head of mining at Cadiz Corporate Solutions Peter Major said.

Mining companies were drowning in debt and most of their employees were now making five to seven times what they were 15 years ago, but with flat to worse productivity, he added.

“We did not save, nor spend wisely … and so now the only solution, unless we can increase our productivity overnight, is to shrink and rationalise production — which inevitably involves closing some operations and retrenching some employees,” Mr Major said.

The decline was due to lower iron ore, coal, gold and diamond production.

Production at De Beers Consolidated Mines SA declined 8% to 1-million carats, largely as a result of reduced throughput and processing lower grades at Venetia, again as a response to current trading conditions.

Anglo American reported last month that production from Kumba Iron Ore fell 12% to 11.4million tonnes while export thermal coal production dropped 2% to 4.9-million tonnes.

There was a rise in platinum group metals production, but many analysts believed the increase could still be due to low base effects created by the strike last year. With Allan Seccombe.

Any contraction offers a good reason for the Bank to pause its hiking cycle