NOMPU SIZIBA: Stats SA released mining production figures showing that in February  mining output rose by 0.8% on a year-on-year basis, while for January to February, that is month-on-month, output rose by 3.8%. The year-on-year number is a vast improvement on January’s 8.4% contraction. Let’s get some analysis on the mining sector with Peter Worthington. He’s an economist at Absa.
Thanks very much, Peter, for joining us. The February print looks much better compared to January’s figures. What were the main drivers behind the improvement?
PETER WORTHINGTON: When you look at the detail it was a fairly broad-based improvement in the sense that we had month-on-month increases in the four main commodity items: gold, iron ore, PGMs and coal. They account for about 75% of South Africa’s mining output in general. So they are three-quarters of the mining output.
But what is quite striking is that we had a really remarkable surge in iron-ore production, apparently. In February it rose if you kind of adjust for seasonal factors, it rose by about 24%. And if you look at it, iron-ore production, according to Stats SA data, is up by about 66% on a year ago. I suppose it’s possible that some of those figures might be revised. If you look at Kumba’s recent guidance, they’re saying that their production in Q1 was down somewhat compared to previous years, so I have a little bit of a question mark about that iron-ore data. But nonetheless, the release as a whole is really pretty strong.
NOMPU SIZIBA: I see that coal and gold were laggards, with production there declining by 19% and 9% respectively. Are there any particular downward trends that you’re seeing in terms of those commodities’ output?
PETER WORTHINGTON: Yes. I think there are quite a few about coal over the long run with the move to more renewables and greener energy sources. And gold is an industry, as we know, [where] it is getting harder and harder to sort of get the ore out of the ground because it’s getting deeper and deeper. But when we look at them on a month-on-month basis, they rose. So I don’t think that there are necessarily any issues there.
Obviously PGMs are going to see a very big increase in Q1 as a whole compared to Q4, because we had all of those production problems, technical issues at smelters and so forth, with work stoppages in Q4 last year.
So we had a very big increase in PGM production in January and then another more modest month-on-month increase in February. But for Q1 as a whole it’s going to increase.
I think it’s a really encouraging release for the growth prospects in Q1. We do this thing where we have a GDP tracker, where we take all of the high-frequency indicators like mining production, manufacturing production and so on, and we plug them into a tracker. And what this release is suggesting is the upside estimate for Q1 is sitting at 1.1% growth, and our official forecast that comes from our macro model is sitting at just 0.3%. So we’ve got upside risk in there, according to the tracker. Mining really is offsetting some of the weakness that we’ve seen in the manufacturing sector in Q1 – especially for the distillers and the brewers and other people involved in alcohol manufacturing; they were really hit by the sales restrictions.
NOMPU SIZIBA: So what about commodity prices? We’ve often been hearing that they’ve been on a tear, but is that broadly speaking or is it specific minerals?
PETER WORTHINGTON: Well, listen, I think it’s quite broadly speaking. We’re seeing a strong upside in the platinum group metals, especially things like palladium and rhodium, but that’s been true for a while now. Gold prices are sort of elevated compared to where they’ve been over the last few years, and iron ore is always doing very well.
I think if we subscribe to this view that we’re going to have a bit of a synchronised global upturn as a result of widespread global Covid vaccination this year, as well as the absolutely enormous stimulus that we’re seeing coming out of the US, then I think the outlook for commodity prices looks pretty good into the rest of 2021 as well.
NOMPU SIZIBA: So which specific commodities do you think would do well from the US infrastructure investment plan?
PETER WORTHINGTON: Well, anything with, I suppose, an industrial usage. You’d be thinking about things like iron ore in particular. I think with the move to more green energy, there are lots of uses for PGM-type metals in a whole variety of applications in the green sphere and the technology sphere. So those would be the ones that I would think of.
And then of course, if we do sort of see this big stimulus, and this global upturn starts to spark inflation, then we could actually see gold get a bit of a benefit from that as well.
NOMPU SIZIBA: Yes. It’s important that our resources sector does well, but we want a broad-based growth situation in South Africa. But to what extent, assuming that the resources really sky-rocket, do you think they’ll help to catalyse the rest of the South African economy?
PETER WORTHINGTON: Well, it’s money that is flowing into the producers from the sale of these goods that will encourage them, I presume, to expand production and sort of keep on going for South African holders of these stocks. There would be dividend income that would derive from this tremendous profitability that you’re seeing in the mining houses.
And then I think maybe one of the most important things that we’ve seen, just very recently, is Mr Kieswetter announcing that we had R38 billion more tax collected in the last fiscal year than we actually expected, even at the February budget. And a big chunk of that is due to this really robust performance from the mining houses. It’s not the only reason, but it’s a big chunk of it. And if that continues it’s very welcome because one of our big pressing challenges right now is to get on top of our fiscus.
NOMPU SIZIBA: And overall, are you a bit more upbeat about the prospects of the economy?
PETER WORTHINGTON: I am. And it’s very nice to be able to say so, because I think all of us who love South Africa are really, really keen to see it succeed. So it’s really nice. If we think about how gloomy things were, let’s say back at the time of the MTBPS (Medium-Term Budget Policy Statement) in October, and how it’s all starting to feel somewhat more positive now, certainly on the fiscal front. But there are signs of other positive things happening. I think we can feel a little more optimistic, but I don’t want to completely discount the big challenges that we have ahead of us.
For example, we’re still below the level of employment that we had pre-Covid, and that causes a terrific degree of social challenges for the country that is going to be hard to address. But I was struck by something that the President said in his newsletter this week, which I hadn’t picked up on when the news came out:
that was that South Africa had been ranked as the top country for business-processing outsourcing in a poll of some 600 executives done over eight countries. That’s quite exciting, because that could be a tremendous growth area for us.
NOMPU SIZIBA: Indeed. That was Peter Worthington. He’s an economist at Absa.