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Cape Town - The Mining Charter in its current form is likely to have dire consequences for investment and job creation, but the final version is expected to be very different.
This is according to Overberg Asset Management in this week's overview of the economic landscape.
READ: Resources up as JSE cheers bid to block new Mining Charter
Due to the absence of a consultative process and its considerable
ambiguity, the Charter is likely to be stuck in the law courts for
years.
South Africa economic review
• Consumer price inflation (CPI) picked up slightly from 5.3% year-on-year in April to 5.4% in May, attributed to a rise in fuel inflation from 5.6% to 8.0% and in food inflation from 6.6% to 7.0%. Meat price growth increased from 10.5% to 12.3% as improved weather conditions encouraged farmers to rebuild their herds.
Core CPI, excluding food and energy prices, remained unchanged at 4.8%. Despite the slight uptick CPI remains well below the upper range of the Reserve Bank’s 3-6% target and is likely maintain its softer trend in response to a strengthening rand, weaker oil prices and subdued domestic demand. The time is ripe for the Reserve Bank to initiate its interest rate cutting cycle.
• The Reserve Bank’s Quarterly Bulletin confirms the current account deficit widened from 1.7% of GDP in the fourth quarter (Q4) to 2.1% in Q1.
The increase is attributed to a widening in the income deficit from 2.1% of GDP to 2.6% due to a drop in offshore dividend receipts. Despite the increase, the 2.1% current account deficit shows a marked improvement on the 5.0% deficit in the same quarter last year and the 3.3% recorded for 2016. The narrowing current account deficit is positive for the rand.
• The Reserve Bank Quarterly Bulletin confirms that growth in gross fixed capital formation slowed from 1.7% quarter-on-quarter annualised in the fourth quarter (Q4) to 1.0% in Q1. Spending by general government and public corporations slowed sharply from 19.8% to 4.4% and from -3.3% to -2.7% respectively, constrained by fiscal consolidation.
Growth in private sector capital spending improved from -1.7% to 1.2% turning positive for the first time since Q3 2015, signaling the first green shoots of an economic recovery albeit before the ill-fated government cabinet reshuffle and subsequent credit rating downgrades.
Household consumption expenditure contracted -2.3% with real disposable income shrinking -1.6% following a 2.3% rise in Q4. However, the ratio of household debt to disposable income continued to improve from 73.5% to 73.2%.
The Quarterly Bulletin’s expenditure data reflects weak domestic demand constrained by fiscal consolidation and a lack of consumer confidence. The data should embolden the Reserve Bank into initiating monetary easing.
• The Reserve Bank composite leading economic indicator (LEI), which measures economic conditions 3-6 months ahead fell for a second straight month from 98.3 in February to 97.5 in March and 96.7 in April. Coming after the government’s ill-fated cabinet reshuffle the latest LEI decline had been expected, taking it back to its lowest since December.
Among the ten components making up the LEI the biggest detractors were a deceleration in the number of building plans passed and a deterioration in the BER Business Confidence Index. The largest positive contributions came from an acceleration in job advertising space and an increase in manufacturing orders.
• Foreign investors sold -R3.123bn of domestic bonds in the week ended 16th June marking the biggest sell-off in 19 weeks. The sell-off is attributed to concerns over the new Mining Charter and suggestions by the Public Protector that the mandate of the Reserve Bank be changed.
For the month-to-date total foreign inflows into domestic bonds have reduced to nil while outflows from the equity market have risen sharply to -R14.61bn.
For the year-to-date, foreign investors have purchased a net R45.52bn of domestic bonds although by contrast net foreign equity sales have increased to a substantial -R58.74bn, culminating in a combined net outflow of -R13.22bn.
Although inflows into South Africa’s bond market should resume alongside rising global demand for emerging market debt, the threat of continued political uncertainty and further credit rating downgrades looms large.
The week ahead
• Quarterly employment statistics: Due on Tuesday 27th June. The first quarter quarterly employment statistics are expected to mirror the weak labour market conditions reported in the quarterly labour force survey in which unemployment increased to a record high 27.7%. While jobs are being created these are too few to accommodate a rapidly growing labour force.
READ: Employment declines for the quarter
• Producer price inflation: Due Thursday 29th June. Producer price inflation (PPI), which slowed from 5.2% year-on-year in March to 4.6% in April, is expected to rise slightly in May to 4.9% due to higher fuel prices. Prospects of a substantial fuel price cut in July coupled with continued agricultural disinflation should enable PPI to resume its downward trend over the remainder of the year.
• Private sector credit extension: Due Thursday 29th June. Growth in private sector credit extension (PSCE) is likely to slow slightly from 5.9% year-on-year in April to 5.8% in June amid weak business and household confidence.
While corporate credit extension is reasonably buoyant at around 8.5% household credit extension is especially weak at under 3.0%. According to the National Credit Regulator over half of credit active consumers are in arrears.
• Trade balance: Due on Friday 30th June. The trade balance is expected to show its fifth consecutive surplus in May lifting from R5.1bn in April, due to the Easter related slowdown.
Since the start of the year the trade surplus has measured R9.89bn compared with a deficit of -R26.39bn in the same period last year. Imports are declining due to weak domestic demand at the same time that exports are rising in response to increased global demand and improving international commodity prices.
Technical analysis
• The rand has broken key resistance at R/$13.00 pointing to further gains towards R/$12.50 and thereafter R/$12.00.
• The US dollar index has tried but failed to break through a major 30-year resistance line suggesting the three-year bull run in the dollar may be over.
• Following the announcement of the snap election the British pound has broken above key resistance at £/$1.25 which has now become a key support level and should promote further near-term currency gains. Recent strong gains have diminished prospects for a £/$1.18-1.22 target.
• The JPMorgan global bond index is testing the support line from the bull market stemming back to 1989, which if broken will project further sharp increases in bond yields.
• The US 10-year Treasury yield has broken back below the key resistance level of 2.0% providing continued support for the multi-year bull trend in US bonds.
• The benchmark R186 2025 SA Gilt yield is trading in a tight trading range of 8.5-9.0%. A break above 9.0% is required for the yield to move decisively higher towards the 10.5% target level.
• Key US equity indices, including the S&P 500, Dow Jones Industrial, Dow Jones Transport, Nasdqaq and Russell 2000, have simultaneously set new record highs, confirming a bullish outlook for US equity markets.
• The Brent oil price has broken below key support at $50-55, indicating a sharp decline to the $40-45 range. Base metal prices are in a bull trend confirmed by copper’s increase above key resistance at $5 500 per ton.
• Gold has developed an inverse “head and shoulders” pattern, which indicates further upward momentum and a test of the $1 400 target level.
• A break above 54 200 on the JSE All Share index would project an upward move to 60 000 marking a new high for the JSE.
Bottom line
• Despite its profoundly negative implications for South Africa’s mining industry, the revised version of the Mining Charter has only had a muted impact on the JSE Resources Index. The Resources Index has fallen since 15th June when the Charter was first made public although only by 2.4%.
• Unlike its predecessors, the original 2002 Mining Charter and its revised version in 2009, the current Charter has lacked consultation between the government and other stakeholders including labour and the mining industry itself.
Chamber of Mines president Mxolisi Mgojo criticised the lack of consultation: “The lack of meaningful engagement with the industry, and collective engagement with all stakeholders, has been most disappointing.” Within hours of the Mining Charter’s release the Chamber of Mines announced that it would seek a legal challenge to its implementation.
• Key aspects of the Mining Charter include an increase in BEE shareholding of all mines from a previous 26% to 30%. In addition, 50% of all board members and executive management must be black while 70% of all mining goods and 80% of all services in the mining industry must be procured from BEE entities.
New mining rights are subject to a 1% revenue payment to BEE shareholders prior to any shareholder distribution. Mining companies will have only 12 months to comply with the new Charter objectives. In their current form the Mining Charter objectives will incur significant additional costs for new and existing mining with dire consequences for investment and job creation.
• Due to the absence of a consultative process and its considerable ambiguity, the Charter is likely to be stuck in the law courts for years. The final version is expected to be very different. Investors should take advantage of the knee-jerk albeit mild reaction to the Mining Charter, by raising exposure to the resources sector.
• The outlook for global metals demand remains strongly positive helped by synchronised world economic growth and rising prospects for infrastructure spending across the US, China, India, the Eurozone and UK.
At the same time, new mining investment has dropped sharply and the financial health of the mining industry has recovered from its 2015 decline. The resumption of dividend payments is likely to provide the catalyst for a sector re-rating.
For the full report, including a look at international markets, click here.
* Overberg Asset Management (OAM) is an Authorised Financial Services Provider No. 783. Overberg specialises in the private management of local and global discretionary portfolios as well as pension products.
Disclaimer: Information and opinions presented in this report were obtained or derived from public sources that Overberg Asset Management believes are reliable but makes no representations as to their accuracy or completeness. Any opinions, forecasts or estimates herein constitute a judgement as at the date of this Report and should not be relied upon. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Furthermore, Overberg Asset Management accepts no responsibility or liability for any loss arising from the use of or reliance placed upon the material presented in this report.
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