Africa’s pivot

Nov 26 2012 09:34
* Jarred Myers

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ON NOVEMBER 19 Barack Obama visited Myanmar - the rapidly reforming Asian country - this marks the first trip by a sitting US President to the country. Commentators are dubbing this visit an indicator of America's ‘pivot’ in Asia, a strategic deviation to make new friends and alliances in the face of a rising China.

South Africa's recent tumultuous labour unrest highlighted in the media, predominantly in the mining and agricultural sectors are anxiety provoking for foreign investors and locals alike.

As the murmurs persist, investors and local multinationals are actively looking to make new friends and alliances north of the border.

Are we witness to an Africa pivot?

To marshal an optimistic change in market sentiment towards Africa would be a decade too late. The over quoted factoid that seven of the ten fastest growing economies in the world in the decade past were African clearly exposes Africa's phenomenal growth albeit off a very low base.

But as with America's pivot in Asia, the Africa pivot - of gradual diversification away from South Africa - will reshape markets, industries and economies.

As the national bell weather, the mining sector presents an interesting case study for Africa's pivot.

The global mining industry is digesting the latest of several consolidations in recent years: that of commodities tsar Glencore and mining heavyweight Xstrata.

The merged entity with a market cap of $88bn will not be renamed Glen-strata or Xstra-glen but more banally Glencore Xstrata International.

GlenX, which aside from feeding packs of starving investment bankers, M&A lawyers and management consultants will be scouring terra firma for acquisitions to lighten the load of its war chest.

South Africa however, will be focussing less on upcoming acquisitions and more on imminent diversifications, particularly in South Africa's mass employing platinum sector.

How this consolidation will affect South Africa is the subject of much speculation- the brains trust of the combined new GlenX is formidable - natural resource captains of industry will be closely watching Glencore's movements in the region.

Industry pundits have been quick to predict that GlenX will spin off its platinum holdings (Xstrata currently owns 25% of Lonmin and 74% of Eland Platinum as part of Xstrata's alloys division).

It is important to contextualise this as the streamlining which it is and not to misinterpret it as a fundamental vote of no confidence for South Africa.

Glencore is a commodities house and would scoff at platinum mines with their associated high cost structure - in the most idyllic geopolitical environs, all the more so in an environment described by outgoing Anglo American CEO, Cynthia Carroll as one of "arbitrary and unpredictable regulatory change".

Once the dust settles and GlenX moves into the next phase of its growth trajectory there are some enticing strategic plays available.

An upswing in global commodity markets will encourage some bullish behaviour from the $88bn behemoth. An option already mooted is an acquisition of Anglo American, the previous fourth place holder on the mining leader board.

Analysing this scenario yields some interesting observations, none more so than the name of the merged entity – GLANGLOX.
If Anglo valued at $38bn were able to shed its 80% holding in Amplats valued optimistically at $10bn, the combined new mammoth on the block would rise to second place behind BHP Billiton -albeit 40% smaller -with a vertiginous market cap of $116bn, almost 30% more than Brazil's Vale in third place.

The global competitive implications of the top four miners comprising half a trillion dollars aside; this shake-up would have some interesting repercussions for South Africa and particularly for the platinum miners.

A post pivot liberated Amplats without big brother behind it could well be stewarded into a forced marriage with Xstrata's investees mentioned above (Xstrata already has a joint venture with Amplats at the Mototolo mine). The merged entity would control over two thirds of South Africa's platinum market and subsequently over half of global output.

Assuming as AngloGold Ashanti CEO Mark Cutifani recently opined that the nationalisation debate has been "kicked into touch", there is room for optimism in a consolidated platinum industry.

No doubt Africa is and remains no place for sissies, but there are increasingly compelling opportunities for contrarian investors to get ahead of market sentiment and take advantage of the tectonic shifts which are reshaping a post pivot South Africa.

* Jarred Myers is a guest columnist. Views expressed are his own.

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