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IN YEARS TO COME 2005 may well be remembered as the year of the bull, with the South African economy defying the naysayers and notching up record highs on almost every front.
As SA heads into the festive season brimming with confidence at the news that the economy has been growing beyond our wildest dreams, South Africans can rightly look back on a year that marked the longest continual run in economic prosperity the country has ever experienced.
Revised growth figures now show that the economy grew at 4,5% last year (instead of 3,7% as previously thought), with analysts predicting a growth rate of 5,1% for 2005 as a whole.
What's remarkable about that achievement is that it occurred during a year in which oil prices surged to record highs of more than US$70/barrel and skills shortages threatened to tether the economy to a level somewhere below 4%.
Yet oil was not the only commodity that surged to record highs. Platinum ? with SA holding two-thirds of the global reserves ? also pierced the psychological barrier of $1 000/oz, while gold broke through the key level of $500/oz for the first time since 1987.
That all helped propel the JSE to its own record highs as foreign buyers piled into SA equities, raking up R50bn in shares that helped make 2005 the best performing year ever on the local exchange.
And 2005 will also be remembered as the year that SA finally managed to shake off the foreign direct investment (FDI) bogey that has hampered it ever since the advent of democracy. FDI inflows also notched up record highs, with Barclays plc's acquisition of Absa for a mammoth R32bn and Vodafone's useful injection of R16bn to up its stake in Vodacom from 35% to 50%. Meanwhile, rumours persist that a foreign buyer is set to acquire a stake in MTN.
The past year also saw all three major ratings agencies ? Standard & Poor's, Moody's and Fitch ? hand SA a credit rating upgrade, illustrating the almost unanimous opinion that SA can now be regarded as a politically as well as economically stable democracy.
Despite the relentless rise in oil prices, SA's economy managed to weather the storm, with October's CPIX inflation figure coming in at a relatively tame 4,4% year-on-year. At 4,2% year-on-year in October producer price inflation was similarly benign.
All that helped the economy maintain a stable interest rate of 10,5% after the surprise cut of 500 basis points in April, thus helping to prevent a hard landing for SA's property market as many had predicted.
However, 2005 will also be remembered as the year of countrywide protests over abysmal service delivery in poorer communities, which culminated in the typhoid outbreak that claimed five lives in the Mpumalanga town of Delmas.
SA's lack of skills also came into sharp focus in 2005, with Government admitting that it was proving counterproductive to both the delivery process and economic growth. Government even admitted that its own affirmative action policies may have had "unintended consequences", with Deputy President Phumzile Mlambo-Ngcuka recently indicating that employment equity that results in poor service delivery is unconstitutional.
On a more positive note, 2005 also saw Government's investment drive kick into gear, with Eskom and Transnet announcing investment drives totalling R134bn to boost the country's infrastructural capacity.
The State-led Coega Industrial Development Zone also shrugged off criticism that it was destined to become a white elephant with the signing of its first tenant, a Belgian-based niche textile manufacturer called Sander International.
Other tenants soon followed: a R1,1bn investment in a chlorine refinery and desalination plant by a joint South-east Asian and South African company, plus a R1,6bn investment in a stainless steel precision mill by German company MAN-Ferrostaal as part of its arms deal offset obligations.
However, uncertainty still surrounds the role of anchor tenant Alcan, with the company recently indicating that it's now considering taking a 25% to 35% stake in an aluminium smelter project. Though that's lower than the initial 49% stake earmarked by Pechiney (the original partner bought out by Alcan) the potentially positive outcome could further boost Coega's viability.
Globally, economic growth continued in the world's major economy, the United States, despite persistent fears about its budget deficit and overheated housing market.
The year also saw the appointment of a successor to long-standing Federal Reserve Chairman Alan Greenspan. Academic economist Bernard Bernanke, who takes over responsibility of the US central bank in February 2006, is widely regarded as the logical choice to succeed Greenspan. However, indications are that he'll implement a stricter inflation targeting methodology to replace Greenspan's more flexible approach.
The European Union's two major economies ? France and Germany ? continued to struggle, with Germany the weaker performer of the two. The rejection of a draft EU constitution by voters in the Netherlands and France, and the subsequent announcement by Britain that it would not hold a referendum on the issue, all served to undermine confidence in the euro and heightened confusion with regard to the future direction of the economic alliance of European states.
Japan also continued to show glimpses of a recovery from its decade long recession with both the economy and stock market enjoying a more positive year after news of a rise in wages and employment levels, which analysts hope will see the country shrug off the deflation that has undermined all attempts to pull clear of the continued recession.
On the SA front, economists seem unanimous in their faith that the economy will continue to power ahead barring any dramatic slowdown in the world economy or a sudden drop in commodity prices.
Whether or not the party will continue is up for debate but what's almost certain is that forthcoming New Year resolutions may well find South Africans simply wishing for more of the same.
Garth Theunissen
gartht@finweek.co.za
China's century
IN SEPTEMBER Chip Goodyear ? CEO of BHP Billiton, the world's largest mining company ? said the world had changed forever. Roughly 20m to 30m people in China were making their way from rural to urban centres. Says Goodyear: "They're saying: 'This is our century.'"
"Of the people on earth, 2,7 billion are classified as consumers, with 1,2 billion of these living within Western markets. The number of consumers living elsewhere is growing fast and could more than double by the end of the decade," wrote John Meyer, an analyst at Numis Securities.
What that means is vaulting consumerism. The newly urbanised need houses and offices to work in as well as roads and cars to help them commute. And while they live in the cities, they also need the normal trappings of modern life, from hairdryers to toasters. The demand on basic manufacturing materials is consequently huge.
The potential of China has been common knowledge for years, but in 2004 it was anticipated that the pace of the world's fastest growing economy would start to slow. But 2005 has shown no let up. In fact, China's authorities are now having to impose measures to help slow down growth.
The effect on world stock markets has been significant. Net operating cash flows of the world's top mining companies doubled to US$41bn in 2004, according to a survey by PricewaterhouseCoopers. The expectation is for further growth this year. In June, BHP Billiton was generating £22m/day in net profit. Xstrata, another diversified mining house listed in Britain, was generating £6m/day.
And the leverage of the mining companies to metal prices has become a significant factor owing to the runaway value of certain base metals, such as copper. Every 10% change in the copper price is worth $350m additional to Xstrata's pre-tax earnings.
The outcome is that many mining companies have more cash than they know how to properly use. That's reflected in the $2bn share buy-back by BHP Billiton and a similar $1,5bn capital programme by Rio Tinto. Last month, Anglo American unveiled its own $1,1bn cash return to shareholders.
The question is whether the commodity boom can last another year. Some believe it can.
John Reade, a precious metals and currency strategist at UBS Investment Bank in Britain, says that the $50bn to $100bn invested in the world's commodities markets by investment houses could be inflated by a portion of the funds diverted from the $50 trillion currently invested in general markets. Says Reade: "There's a wall of money on its way and coming to a commodity market near you."
Apart from the increase in demand from China (and to a lesser extent, India) there's also a structural problem in the world's mining industry exacerbating the supply deficit. That's the years of under-exploration, which has meant that mining firms can't find enough new sources of metal quickly enough. There's also massive pressure on resources needed to mine products ? such as rubber tyres and machinery ? and shipping undercapacity.
Johannesburg's resources Top 20 index subsequently gained 60% this year to end-November. Anglo gained 58% over that period and BHP Billiton was up 56% from when it peaked in October.
Even smaller shares, such as Metorex, a once sleepy mid-tier mining firm, gained traction in 2005. Its share price gained 96% during the year, largely on the back of prospects for its copper/cobalt operations in the Democratic Republic of Congo.
In fact, Africa has been one of the major beneficiaries of the continued commodity boom during 2005, because it's opened up as a major investment destination, notwithstanding its political risks. For example, Actis, a Canadian fund, has established a pan-African $162m Canada Investment Fund for Africa in Accra, Ghana. It's joined by Cordiant, a prime Canadian emerging market asset manager.
The scramble for market share among mining firms has resulted in some interesting merger and acquisition developments. Xstrata has twice failed to breach the Australian market, having been outbid for WMC Resources by BHP Billiton's $9,2bn bid. Inco bid $12bn for Falconbridge after Xstrata had paid $1,6bn for a 19,9% stake in August.
But one of the more interesting tussles was Anglo's bid for Kumba Resources, a two-year long struggle that was finally resolved in October. Anglo owned around two-thirds of Kumba Resources, but Government had insisted it drop its stake to below 50%, preferring instead to preserve the independence of one of SA's best new mining firms.
However, a meeting between Anglo CEO Tony Trahar and President Thabo Mbeki earlier this year ? ostensibly about the British firm's end-year results that had just been published ? settled the matter.
Months later, Anglo unveiled a plan to split Kumba into half and separately list Kumba's iron ore assets, in which Anglo would have a controlling stake. That was the key. In the world of commodities, iron ore is the prom queen. Used in the fabrication of steel, annual contract prices for iron ore between miners and their, predominantly, Chinese and Japanese buyers (steel producers) were settled at a 71,5% increase in April. That was already on the back of an 18,6% price increase last year and ahead of another quantum leap in pricing next year.
Companies producing iron ore can't fail but make a fortune. It's also one of the reasons that the world's mining companies are falling over themselves to produce more of the stuff.
But is the commodity market about to cool? One alarming factor was the activities of Chinese state trader Liu Qibing, who took short positions in July and August on about 130 000 t of copper on the London Metals Exchange, agreeing to deliver by 21 December at $3 300/t. He bet prices would fall so that delivery could be made with supplies that were cheaper.
According to sources, the Chinese government is now out of pocket by an estimated $300m and Liu is under house arrest. The incident showed a lack of corporate governance in trading circles and is indicative of the excesses of a market at the top of its cycle.
David McKay
davidm@finweek.co.za
Rampant gold ?
RARELY has the gold price been able to breach US$500/oz. It did it once in December 1987 ? but just for a day. And in February 1983 it made a few attempts, peaking at $509/oz before collapsing to $340/oz by year-end. Famously, it notched up $873/oz in January 1980. But in November this year the gold price burst through $500/oz. Finally.
It wasn't a surprise. Analysts were expecting it. "We'll have $500 before Santa arrives," declared Jessica Cross, CEO of Virtual Metals. However, the burning question is whether 2005 will be the year in which gold established genuine bull run credentials.
There's real optimism that it has. Take the comments of Pierre Lassonde, president and CEO of Newmont Mining, who says that the gold price is heading for $550/oz next year and could breach $1 000/oz in the years after that. "Gold is hot and it's going to get hotter."
In 2005 alone the gold price gained 15%. But it's the long-term price activity that's deemed more important, not just because gold has doubled in its value since 2000 but also because so many other economic indicators hang on its performance. A strong gold price normally means investors consider themselves caught in politically uncertain times and that inflation can't be checked, or a weak dollar or a dearth in asset class alternatives.
Those aspects are true. However, this year gold also attracted the interest of traders and speculators, the same group that attacked it in 1999 and taking the metal down to $255/oz. One fear is, therefore, that gold is subject to the same caprice and could lose ground as quickly as it was gained.
The counter argument is that there's been a step change in appetite for gold, helped by crucial alterations in the gold market's fundamentals.
During the Nineties the lower gold price led to widespread underinvestment in exploration. The outcome was that world supply can't be replaced owing to a dearth of viable gold mining projects. Notwithstanding its huge above ground stocks, gold is difficult to come by, at least newly mined gold.
Consequently, companies that said they had gold projects became more popular in 2005. Johannesburg's gold index was 46% higher this year as the deep level, but capacious, Witwatersrand gold mines came back into vogue. The stabilisation of the rand, which weakened 20% against the US dollar in the first six months of the year but then steadied at US$1/R6,50, also helped calm nerves concerning the future of SA's gold industry.
Damaged by the acrimony of Harmony Gold's failed takeover of Gold Fields, which was itself embroiled in legal and regulatory complexities between January and May, SA's gold mining industry looked like a flogged horse. But now gold producers have regained some of their swagger. At the time of writing, Harmony Gold ? almost bankrupt a year ago ? was talking boldly of building a new R5bn mine and buying others.
One gold share particularly was profoundly affected in 2005. It was Western Areas, the company headed by Brett Kebble (41), who was brutally murdered on 28 September. Western Areas shed 27% in the first six months of the year then gained nearly 50% over its R25/share starting price in January in the second half. With 45m oz in the ground, Western Areas is a treasure in the context of falling world gold reserves.
But its mismanagement first led to CEO Kebble being ousted. Then Kebble's death rocked the gold mining industry. Though reviled by banks, except long-term banker Investec, Kebble was considered a colourful and energetic player in SA's mining industry.
Though he left a morass of financial troubles at companies he headed ? forensic auditors continue to pick through a JCI and Randgold paper trail at the time of writing ? Kebble is sorely missed.
In the words of Harmony CEO Bernard Swanepoel, Brett Kebble's financial troubles stemmed from having called the gold price wrong ? twice. The effect on his companies from his risks was disastrously bad.
And yet analysts continue to hazard guessing where gold will go. Has 2005 imposed some predictability into the gold price? You'll think so at your own peril.
David McKay
davidm@finweek.co.za
