Johannesburg - The mining industry may apply the jumper leads to the South African economy according to the Baltic Dry Index, a leading indicator on how well commodity exports are faring, said tax and advisory firm Ernst & Young (E&Y).
The Baltic Dry Index has clawed back some of its losses during 2008 after the liquidity crisis all but killed demand for commodities.
"In May last year, the index peaked at 11 000 points, but at the beginning of December 2008, it fell to around 700 points," said John Wetton, a business director at E&Y.
"It's back to 4 000 points which is indicating an uptick in demand for the shipment of steel and coal," Wetton said.
"In South Africa, a lot of mining projects had been put on hold after people generally became reluctant to invest," he said.
"Nowadays, we no longer get fully-funded projects. It's even difficult to get a 100% home loan, and you're lucky to get 60%," said Wetton.
"The question of how much longer and deeper it will be is difficult to say, but the global meltdown hasn't affected South Africa quite so badly," he said.
'Chindia' stirring
Wetton said stockpiled commodities had now run out in China and India, an economic node collectively referred to as Chindia. "My money is on the revitalisation of China and India," he said. "It's also the Obama factor in the United States, which is showing improvements."
Wetton said these factors would drive demand for resources from South Africa which, in turn, was expected to increase activity in the construction sector.
China - which regularly racked up gross domestic product growth of 9% - is seeing its economy grow by a relatively small 6%. But it would revive: "I don't see things going backwards there," said Wetton.
"This is about how the industry will be able to weather the storm, and I think it can. We're talking of a pick-up on the back-end of 2009, or the beginning of 2010," he said.
Construction companies haven't been hit as hard as banks and mines in South Africa, thanks to government's R787bn infrastructure spend.
Said Sifiso Shongwe, a merger and acquisition director at E&Y: "Africa is different because it has such a huge backlog in infrastructure investment on the private sector, which is being stimulated by government. It is so behind. The last power station South Africa must have been built 20 years ago."
"But if we didn't have government infrastructure investment right now, the [construction] industry would be in a completely different place," said Wetton, who added that government had thrown the construction sector a lifeline for the next five years.
Wetton said that while the economy was in recession, construction companies should start looking at ways to improve efficiencies.
"Maximise opportunities, collect all your debts and do not get exposed to bad debt. And take advantage of distressed assets of competitors in the industry," he said.
- Fin24.com