South Africa’s economic decline – which predates Covid-19 – and the resultant high unemployment rate can easily lead to a false conclusion that investors have willingly lost interest in the country

Investors do fret about a lot of issues. These include policy uncertainty, existence of avoidable regulatory hurdles, lack of sense of unity of purpose, failure to support investors, lack of policy coherence, and failure to realize that investment attraction and protection are important tasks of any government.

But the decision by investors with exposure to South Africa to hold back on investments and, in some cases, to move investments to other jurisdictions abroad, is not easy to make. It is certainly not done willingly.

It would be difficult to pull out or to hold back from investing in a democratic country with enormous economic potential, one that is well-endowed with natural resources. The sad reality, however, is that the authorities often behave as if they are not interested in investments. That’s what drives investor pessimism.

Many investors feel like their appetite to increase their exposure in South Africa is being deliberately blocked by some authorities who are either completely oblivious to the socio-economic crises we face, or they simply don’t care.

Honour to thieves above wealth generators

It is heartbreaking to hear stories about the ease with which dodgy companies that don’t even pay tax rob government (read: ordinary South Africans) of scarce resources in broad daylight. Tough for the wealth creating investors; easy for the thieves who steal the wealth. One wonders if that is the slogan of our times.

These developments raise questions about whether some of those who hold state power are really patriotic. Do they think about the millions of unemployed South Africans? About the empty state coffers? Do they care about social stability? Do they understand that the country needs to generate wealth for the sustenance of the government itself and for it to fulfil its social obligations?

The standard response to these questions would be that authorities are fully aware of their obligations. Few us would like to dispute the commitments made by our duly elected officials. They are, after all, our regulators and policy makers.

But if the ancient adage, “actions speak louder than words”, is used to verify the commitments of our leaders, the evidence suggests that they are not doing nearly enough to tackle the virus of economic contraction. Declining manufacturing capacity, for example, makes for frightening observation.  

Decline of basic beneficiation

Smelting of various minerals – the most basic form of beneficiation – is shrinking in South Africa. There is a risk that it might disappear completely, unless patriotic authorities rise to the occasion to save it. Global mining companies have been reducing their smelting exposure to South Africa.

South32, the Australian miner and mineral processor, which owns a ferromanganese smelter in Meyerton, Gauteng took a $109 million impairment on this smelter. It has put it under care and maintenance, and raised concerns about high electricity costs.

Global mining giant Glencore has put its Lydenburg smelter in Mpumalanga under care and maintenance. During the release of its latest annual report, the company raised concerns that high electricity prices and unreliable supply that makes its smelters not as competitive as they should be.

The chrome smelter in Rustenburg, a joint venture with Merafe, is undergoing restructuring. The Glencore-Merafe venture has raised concerns about power interruption and high electricity costs. Although critics might, with good reason, criticise Glencore for selling coal at high prices to Eskom while expecting cheap power, it doesn’t mean that the company’s concerns about high prices and unreliability of supply are not valid.

In 2014 BHP Billiton closed its Bayside aluminum smelter that produced value-added products for local and export markets in southern Africa. Concerns about electricity supply and costs featured among the reasons for closure.

In 2015 Evraz Highveld Steel and Vanadium Limited de-listed from the JSE and went on voluntary business rescue. It could not compete with cheap products from China as input costs in South Africa, including electricity costs that kept rising.

Arcelor Mittal is struggling due to high input costs, including the forever-rising prices of unreliable electricity. A shadow of its former self as Iscor, Arcelor Mittal is wounding down its Saldanha Works where it reported an impairment of R294 million in 2019.

Arcelor Mittal reported that it was investigating the feasibility of relocating all or part of the steel-making melt shop and rolling mills to Vanderbijlpark Works. It stated: “The plant (Saldanha) was severely impacted by unaffordable increases in regulated input costs – including electricity, rail and port tariffs and raw materials.”

In a rather bleak forecast, Arcelor Mittal concluded: “In the absence of sufficient fair and competitive electricity, rail and port tariffs and developmental raw material prices, this is unlikely to change in the hands of future investors.”

Notwithstanding this situation, Arcelor Mittal was unable to convince authorities to help ease costs burdens. The company is on a continuous restructuring process to save costs. Its share price has been on a downward spiral.

An example of a wonderful investment worth $328-million that South Africa lost to another jurisdiction is that of Sakura, a low-cost ferromanganese producer located in Malaysia. Sakura is controlled by Assmang, a joint venture between Assore and Patrice Motsepe’s African Rainbow Minerals.

It’s not difficult to see the rationale of Motsepe and his co-investors preferring to locate their plant in Malaysia. Why would they put such a reliable electricity-dependent smelter in a country which cannot guarantee them reliable and cheap supply of electricity?

Given the electricity crises we face – which is threatening whatever is left of the South African economy – one would have expected the government to declare an emergency around electricity shortages and high prices to allow it to intervene drastically to raise the level of power generation in the country.

Economic hypocrisy

This would mean making sure that all power generation projects are approved with neither delay nor obstacle. But investors have been frustrated in their attempts to ease the electricity generation constraints.

Mining entrepreneur, Ayanda Bam, the chair of Kuyasa Mining, has for years tried in vain to secure state support to build a 600MW coal-fired power station.

It is also unfortunate that some among our authorities have the luxury to celebrate the fact that a private coal-fired power generation investment that would have attracted billions and would have created several hundreds of jobs at construction and operational phases, is now banned.

The 600MW Khanyisa coal fired power plant project that was planned in Witbank was blocked by Water Tribunal that scrapped its water user licenses citing global warming concerns. This decision was celebrated by many as ground-breaking.

But the next time Statistician General Risenga Maluleke releases the predictably horrifying unemployment numbers, no one will pause and say “hold on a bit, didn’t we have an investor who wanted to create jobs in a new factory, which would have also contributed in easing power shortages and high prices?”

The fact that no one will ask this question demonstrates the extent of economic hypocrisy in our country. The mantra that we are committed to economic growth, job creation and poverty alleviation is not demonstrated by our actions – the things that speak louder than words.

There is no doubt that climate change is a reality. But we have to learn to balance climate concerns with the nuclear bombs of unemployment and poverty that can detonate any time. The fast-vanishing economic base of South Africa is the immediate threat to the country’s socio-political stability.

Balance competing interests

The failure to balance competing interests is also behind the illogical blockage of R1.5 billion investment in a coal mining project in Palmietkuilen, in Springs. While the Department of Minerals and Energy approved the project, after stringent processes of environmental impact mitigation measures were undertaken, the Minister of Environmental Affairs Barbara Creecy blocked it citing concerns about agricultural land. If she knew South Africa properly, she would have appreciated that mining has co-existed with agriculture for centuries.

South Africa has vast agricultural land, some of it lying fallow. It needs capital and skill to turn into productive assets – something one believes Land Reform and Agriculture Minister Thoko Didiza is working on. But if we are suddenly going to ban mining on the grounds of agricultural land, the entire mining industry in South Africa will have to shut down and all the royalties and export earnings which benefit the country’s fiscal position will have to be forfeited.

In the meantime, Eskom will labour under expensive coal contracts because investors are not permitted to access good quality coal that could be mined at reasonable costs and help reduce electricity prices that are suffocating the economy. 

Interest group threats

South African authorities lack a coherent strategy to exploit our natural resources to our fullest advantage and for the benefit of all citizens.

Mineral Resources and Energy Minister Gwede Mantashe issued a statement, celebrating the arrival of the drill rig, to begin work to access oil reserves as part of project Brulpadda commissioned by petroleum giant Total near Mossel Bay.

But it won’t be long before various interest groups, some foreign-sponsored under the guise of representing communities – ironically the very communities that are worst impacted by unemployment – block the promising project.

To cut a long story short: let’s use our resources to our benefit. We are in a deep economic crisis. But we have the resources and investor willingness to solve it.