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18% drop in mining output huge shock for SA economy - economist

May 12 2016 22:30
Carin Smith

Johannesburg - There is no doubt that the fall in mining production in March is a major shock to the South African economy, Mike Schüssler, chief economist at Economists dotcoza told Fin24 on Thursday.

The latest data by Statistics SA shows that production declined by 18% in March compared to a year earlier - the biggest decline in production for the past 35 years.

"I predicted in the past that the super cycle will hit SA hard, and now it is happening. There is always a lot of talk about prices in the mining industry and now prices are starting to influence volumes produced," said Schüssler.

The year-on-year decline in mining production in SA was 4.2% in October 2015. Then it was relatively small in November (1.2%) and December (1.8%). In January it was 5.8%, in February 8.3% and in March the massive 18%.

"So, the decline is becoming bigger and bigger and this will impact gross domestic product (GDP)," said Schüssler.

Although mining only makes up 7.5% of GDP in SA, Schüssler emphasised that the mining industry spends over R300bn per year on buying from other sectors and industries. It also provides employment for a large number of people.

"This will be felt by the transport sector as far less bulk commodities are being transported," he warned.

READ: Anglo's first quarter production falls at most units

He pointed out it will also impact the manufacturing sector, which makes mining equipment. It will impact construction and civil engineering as this sector does a lot of work in the mines. It will impact on our current account as not only are commodity prices lower, but the actual volumes of exports will now decline.

On top of that the banking sector will have less to finance and in Schüssler's view, there will certainly be mass layoffs in the mining sector.

"Mining prices are below the price trough of 2008 in US dollar terms, so this is unlikely to be a once off," explained Schüssler.

"Losing nearly a fifth was made worse by the shift in holidays. So, a part recovery in April may yet happen, but it is not going to last as other months such as January and February show us already."

He warned that this is not good for growth of the SA economy.

"It is very bad for ratings and it means the structure is going to get radically adjusted far faster than we thought," he concluded.

"This is not a happy place for SA to be in at the moment. The economy is in serious trouble. May and June should also show big declines in mining production volumes - I expect between 6% and 10% - and the impact on the economy will be big."

READ: Commodity rout hits home as SA records output drop

Nedbank's economic unit said mining production is likely to remain poor throughout the year as a result of lower commodity prices, weak local demand as well as domestic infrastructure constraints.
 
"Mining figures are volatile and have little influence on policy decisions in the short term, but do underlie the poor economic conditions."

In Nedbank's view, the SA Reserve Bank (Sarb) remains in "the unenviable position of trying to conduct monetary policy in an environment of struggling economic growth and inflation that is forecast to end the year well above 7%".

The unit pointed out that the Sarb has made it clear that it is still in a rate hiking cycle and Nedbank believes it is likely to continue on that path, but will possibly pause at the next meeting before raising rates again in July and September.

ALSO READ: Manufacturing down, gold shines in mining




mike schussler  |  sa economy  |  mining
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