Local companies are hoarding near-record amounts of cash, hurting returns with interest rates at 30-year lows, as concern that President Jacob Zuma’s ruling party could push through policies that will cut profit hold back investments from mining companies.
The ANC, facing protests over a 25.2 percent unemployment rate, starts a four-day policy conference on Tuesday that will debate proposals to nationalise mines, banks and telecoms firms, seize land without compensation and raise mine taxes.
Europe’s credit crisis, slowing economic growth in China, local factories operating at below capacity and inadequate port, rail and road infrastructure are also forcing companies to sit back.
“Investors are going to be taking a wait-and-see attitude,” Nic Borain, a Cape Town-based political analyst at BNP Paribas Cadiz Securities said.
“The policy documents going into the ANC conference indicate a more thorough attempt to share the spoils of the South African economy between those who controlled the old South Africa and those who control the politics in the new.”
Cash belonging to companies sitting on deposit with banks increased 11 percent to R522 billion at the end of April from a year earlier, after reaching a record R540bn in December, according to the latest data from the SA Reserve Bank.
Sitting on cash is costing companies. The average return on equity for the 162 stocks on the all share index last month declined below 22 percent for the first time since the end of 2010, according to data.
Policy uncertainty “doesn’t mean they have to hold the cash”, said Neville Chester at Coronation Fund Managers.
“The cash needs to get returned to shareholders and allocated to other investments” if it was not going to be spent.
The central bank has kept its repurchase rate at a 30-year low of 5.5 percent since November 2010 to offset effects from Europe’s debt crisis on growth, which it estimates may slow to 2.9 percent this year from 3.1 percent last year.
Zuma, 70, is being pushed by some members of the ANC, its youth wing, the SACP and the Cosatu to use the country’s mineral wealth to improve the lives of black citizens, many of whom live in poverty 18 years after apartheid ended.
Tuesday’s ANC conference will be followed by another in December, when decisions will be ratified and leaders for the organisation elected.
“While there is need for change we’re not looking at a counter-productive platform of policies,” ANC spokesman Keith Khoza said on Thursday.
The ANC would “adopt what is responsible”, he added.
While an ANC-commissioned study released in February found that seizing mines would be an “unmitigated economic disaster”, it recommended imposing a 50 percent tax on mining companies’ earning returns in excess of 15 percent, levies on the sale of prospecting rights and more taxes on companies based in offshore tax havens.
“One of the concerns investors have is what is going to happen here; the sooner we can get clarity, the better,” Nick Holland, the chief executive of Gold Fields, said on May 17.
“That’s what investors want and that’s what we want as well as a company that is investing heavily.”
Gold Fields has R5.2bn in cash on its balance sheet after reaching R6.1bn in December, the most since at least 1998.
The company is studying opportunities in Finland, the Philippines, Peru and Mali to reduce the proportion of gold that it mines in South Africa, where output has declined since 2009 to 40 percent of total production by 2015 from 62 percent in 2008.
Metals account for 64 percent of exports in the economy, while labour and power costs have increased faster than inflation for each of the past three years.
The mining index declined 2.17 percent to 30 771.82 points in Johannesburg on Friday, taking losses in dollar terms over the past 12 months to about 27 percent, compared with a 6.3 percent slide in the MSCI emerging markets metals & mining index.
“What is not happening, is there is no expansion being put in place on a forward looking basis,” Kevin Lings at Stanlib Asset Management in Johannesburg said.
“The horizon has shortened and the immediate focus has become shorter; companies are not really looking far beyond that because there are too many unknowns to effectively plan into that environment,” Lings added.
The National Union of Metalworkers of South Africa (Numsa), a unit of Cosatu with 300 000 members, recently called for the nationalisation of banks, mines, telecoms and energy companies.
The National Union of Mineworkers, the largest union within Cosatu, doesn’t support nationalisation and instead encourages greater local processing of minerals.
The ANC Youth League has said it wanted Zuma replaced by his deputy, Kgalema Motlanthe.
“We have meetings with big listed companies that are saying if there is policy uncertainty about nationalisation of mines, why am I going to make long-term capital investments,” Nicky Newton-King, the chief executive of JSE Limited, the operator of the stock and bond exchange, said on Thursday.
Mergers and acquisitions, which should be boosted by the cash holdings, were being stalled by the political and global economic environment, Mike Brown,the chief executive of Nedbank Group, said on May 18. Deals dropped 18 percent to R54.2bn in the first half compared with a year earlier, according to data.
The policies up for debate “present a whole range of threats that could be keeping those companies from spending their money”, BNP Paribas’ Borain said.
“They are also an attempt to make South Africa more sustainable in the long term and make the South African story a more enduring one.” – Stephen Gunnion from Bloomberg