China's boom a boon for SA workers
Posted on February 8, 2015
IN December 2011, more than 6 000 workers at South African company Kumba Iron Ore each received a payout of R576 045.
They were being rewarded for the good fortune of being employed by a company that supplied commodities to the booming Chinese market.
The dramatic growth in the Chinese economy, from $950-billion in the late ‘90s to a current $10-trillion (R113-trillion), saw the iron ore price surge from about $10 in 2003 to a peak of $170 in early 2009. By 2011, when Kumba paid out the windfall to its workers, the price had eased back to about $150.
Because of its unusually generous black empowerment scheme, Kumba, part of the Anglo American group, was one of the very few South African companies that spread the benefits of the boom beyond its executives and traditional shareholder base.
Years earlier, the surge in the platinum price, also helped by the China boom, had prompted a much less well-considered response from Anglo American.
The huge dividends it received from Anglo Platinum seemed to be burning a hole in its pocket. Anglo undertook a $10.7-billion share buyback between 2006 and 2008, at the market peak. It destroyed billions of dollars of value.
The Chinese government’s focus on developing the country’s infrastructure has been a boon for commodity producers, many of which are South African.
Iron ore, platinum and coal account for about 60% of South Africa’s exports. Companies in these sectors saw their share prices surge. But there’s not much to show for the billions of dollars of profits. Most have been pocketed by shareholders.
Martyn Davies of Frontier Advisory believes there will be some recovery in commodity prices this year. He points out that although China’s growth rate is slowing down to an estimated 6% or 7% this year, it is now a $10-trillion economy.
In 2005, when it was growing at more than 10%, it was a $2-trillion economy. The rate of growth might have slowed, but the economy is much larger.
Davies said Australia had invested in cutting the cost of its mining operations and would be well placed to benefit from the tighter conditions in the commodities market.
“The countries that will struggle are those with high infrastructure costs, such as South Africa,” he said.
Gavin Woods, chief investment officer at Kagiso Asset Management, said that even at 5% growth, China remained extremely strong and would continue to play a material role in the global commodities market.
He believes the problem for commodity producers such as South Africa is that a weakening in demand is coinciding with a strong increase in supply.
But Woods believes the more important issue is to get a handle on the composition of China’s future growth.
“The current [Chinese] government plan is placing a much greater emphasis on increasing consumer spending.
“Our commodity companies will continue to benefit from Chinese demand, but there will be more attractive opportunities in the consumer sectors.”
BusinessDay