Market watchers Verster, Gungqisa on Oil, ArcelorMittal, Dutch Disease

I filled in on CNBC Africa’s Open Exchange programme the past few days, experiencing quite a change in pace from the high energy Power Lunch show. But if you haven’t watched it yet and are interested in the Africa story, you’re missing out. Among the discussions this morning was the one reproduced below with market watchers Jean Pierre Verster of 36One and Singa Gungqisa of Vunani where we focused on an unconfirmed report that Arcellor Mittal is about to close its South African plants, the arguments around beneficiation and the oil price. – AH    

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ALEC HOGG: Singa Gunqisa and Jean Pierre Verster are still with us. Just before you joined the conversation Singa, we were talking about ArcelorMittal – a newspaper report this morning – which says they’re looking to close South African plants. Now it isn’t on SENS and it was something that could very well be speculation. But Why would a company like that even be thinking in those terms?

SINGA GUNGQISA: Well, it’s fairly simple. If you’re running a business, you want your business to be profitable. You’re then going to look at what the profit-drivers are, and one would look at things, such as demand. Demand for steel – globally – is coming off a bit and on the back of the fact that, the global economic growth is currently not strong. You also look at cost drivers. We’re in an involvement where resource companies are experiencing a cost escalation every year from a labour point of view as well as from electricity, which is influencing their operational models.

ALEC HOGG: A steel plant takes ten years to build. You don’t just close it because circumstances are against you in one period in the cycle.

SINGA GUNGQISA: I think those circumstances have maybe come to the fore a couple of years back, and that’s just become more significant as time goes. It’s become harder to actually, operate profitable business in this kind of economic cycle.

ALEC HOGG: It’s a real concern, what Singa’s just said Jean Pierre, because it’s a broader issue that manufacturing in South Africa is facing.

JEAN PIERRE VERSTER: Unfortunately, in South Africa that’s also called the Dutch Disease to some extent where, because we are so resource rich it’s actually negative. You can make a lot of easy money by just exporting the resource versus actually, doing the hard work and creating the capacity locally to beneficiate the resource at a reasonable price to be globally competitive. That’s almost, our problem as a company where we are not globally competitive because of high wages, increasing electricity, logistics, and other reasons. Then you have other countries, which are lower on that score such as China, which has an overcapacity in terms of their steel industry. They have less apartment blocks and all kinds of other infrastructure-led activity that they are producing. It uses less steel. That excess capacity needs to go somewhere. It’s exported, ends up at our doorstep, and it puts further pressure on our local beneficiaries.

ALEC HOGG: It also shoots right into the heart of this beneficiation argument. Sure, we have iron ore, which is used to make steel. It’s going to cost us too much to take that raw iron ore to process it into an end product. As result, the whole beneficiation argument falls out.

JEAN PIERRE VERSTER: Yes. Beneficiation won’t work in every single resource. For instance, it could work in platinum because we are a significant global player in that market. Iron ore does have a good mine in Sishen, but there are mines in Australia that are even at lower cost. In South America, some mines are coming on line as well, at lower cost. It does mean that from our viewpoint we think we have great iron ore, but globally, we’re not that competitive. Outside of platinum, one needs to think really hard to find any other commodities with which we would be in a position to have a competitive advantage.

ALEC HOGG: A nice, simplistic kind of thing. Well, we have all the resources……let’s beneficiate it. The point that you were making (electricity and labour costs) make that impossible.

JEAN PIERRE VERSTER: Correct.

TUMISHO GRATER: On that topic of commodities, let’s perhaps talk about Brent Crude because that has definitely been one that has peaked in the analysts’ interests. OPEC countries are saying they’re not going to be coming in to restrict supply.

SINGA GUNGQISA: Yes, it’s just continuing to fall. Again, this has been spoken about repeatedly. It’s really a function of demand and supply with supply currently being very strong coming from the U.S., and demand becoming very weak as well as we see in the past few weeks. In addition, you have China coming out with numbers where their imports are actually not as strong there. Their oil imports are not as strong as people expect. They are one of the largest economies to use Brent Crude and if their numbers weren’t good, we’d expect this kind of selling to continue. There’s just no support for the oil price, currently.

ALEC HOGG: The impact for Africa though, is dramatic. Yesterday, on Open Exchange, we had an interview with a London analyst that Wally did from Nigeria where the Americans, – because of fracking, they’re no longer reliant on African oil – have stopped importing. I was just doing a couple of calculations in our break. The Kenyan economy few five-point-eight percent, which is great but it’s going to take 21 years at that growth rate and South Africa sitting still, for the Kenyan economy to get to South Africa’s size. We talk a lot about the African story and we’re excited about it but if we take away 60 percent of our exports, which is oil, where does it leave us?

SINGA GUNGQISA: Yes. It just makes things a lot more difficult for the country to start growing at decent levels where everyone can participate in the economy and take things forward. Of course, Brent Crude is one of the more highly used commodities and if there’s just no demand for it, it’s going to be very difficult to grow as an economy. However, it’s not such a bad thing where our oil prices are lower because it means that our fuel price could come down and we could put a cap on the inflation as well.

ALEC HOGG: But Africa needs oil. Sixty percent of Africa’s exports are oil. Surely, we should be taking this very, very seriously as a continent. If the Americans suddenly shut off all of their oil imports – which they’re busy doing, so you take a big issue out of the equation – we have to start thinking differently.

SINGA GUNGQISA: Yes, we have. We have to start looking at ourselves as a high manufacturing economy, rather than just as exporters. Therefore, we should find uses for that oil within our shores/borders in order to keep those prices up there and still be growing economies, rather than just relying on demand elsewhere.

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