Tshepiso Mokhema

The third consecutive month of contraction in South African mining output risks boosting the country’s trade deficit as exports dwindle, weighing on central bank options for stimulating the economy.

Production declined 4.5 percent in November from a year earlier, Statistics SA said in a statement yesterday. A drop places pressure on the rand as demand for the currency is curbed.

The rand has slipped 2.5 percent against the dollar this year, the worst performance among emerging market currencies. This follows Fitch Ratings’ downgrade of South Africa’s credit to the second-lowest investment grade.

Anglo American Platinum (Angloplat), the biggest producer of the metal, said yesterday that it would cut almost a quarter of its workforce as it shut four shafts.

Strikes last year at mining companies including Angloplat, Gold Fields and Lonmin curbed output, which accounted for 9.8 percent of gross domestic product (GDP) in 2011.

Production may remain sluggish this year as Harmony Gold, Africa’s third-largest producer of the metal, last week said that it might close its biggest mine.

A weaker currency erodes returns on rand bonds for foreign investors while increasing the nation’s import costs as exports slow.

Operations idled

“The trade numbers are going to continue to reflect the fall-off in production,” Stanlib Asset Management economist Kevin Lings said yesterday. “We don’t think we’ve seen the full effect of the loss of production in the trade numbers yet.”

The median estimate by four analysts was for mining output to drop 6.2 percent.

Harmony has started talks with unions that may result in about 6 000 job losses and the closure of its Kusasalethu mine west of Johannesburg. Production had been halted since December 20 because of strikes and violence, chief executive Graham Briggs said in a presentation last week.

Kusasalethu reached just 22 percent of its output target for the quarter to December because of the labour unrest.

Angloplat said in a statement that it would place four shafts on care and maintenance, cutting annual production by 400 000 ounces, and warning that as many as 14 000 jobs were at stake.

The cost of protecting government debt against non-payment using credit default swaps over five years rose 7.28 basis points from January 7 to 144.5 on Monday, signalling a deterioration in risk perception.

The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent if a borrower fails to adhere to its debt agreements.

The value of South African exports grew 1.4 percent in the 11 months to November from a year earlier, with mining products comprising 61 percent of shipments, data from the SA Revenue Service show.

Shipments of precious metals and stones slumped 15 percent, while base metals exports dropped 3.2 percent.

While the trade deficit was the smallest in four months in November, the gap in the first 11 months of last year was R112.7 billion, more than six times bigger than a year earlier.

A weaker rand adds to import costs, making food and fuel more expensive. For every 1 percent drop in the currency against the dollar, the inflation rate rises as much as 0.2 percentage points, Standard Bank said.

The rand, which depreciated 4.5 percent against the dollar last year, weakened 0.7 percent to R8.7561 by 11.38am in Johannesburg yesterday.

The Reserve Bank’s monetary policy committee kept its benchmark repo rate unchanged at 5 percent, the lowest in more than 30 years, on November 22.

Since a surprise rate cut in July, central bank governor Gill Marcus tempered expectations of further reductions as the rand’s depreciation added to pressure on inflation, limiting the bank’s ability to boost an economy that is expanding at its slowest pace since a recession in 2009.

Inflation reached 5.6 percent in November, near the top of the bank’s 3 percent to 6 percent target band.

The shortfall on South Africa’s current account, the broadest measure of trade in goods and services, remained at 6.4 percent of GDP in the third quarter, close to a four-year high.

Africa’s biggest economy relies on foreign investment in stocks and bonds to finance the gap, inflows that have fluctuated as slower economic growth led some investors to sell riskier, emerging-market assets.

Foreign investors were net buyers of R93.4bn of South African bonds last year, double the amount purchased in the previous year.

Yields on rand bonds due in February 2023 have declined 16 basis points this month to 6.63 percent, while yields on dollar debt maturing in May 2022 have climbed 9 basis points, or 0.09 percentage points, to 3.10 percent.

The benchmark rate compares with 0.25 percent in the US and 0.1 percent in Japan, making South Africa an attractive destination for investors who are searching for higher yields.

“Money is still flowing into the country, keeping the rand at bay and countering the weakness in the current account,” Efficient Group economist Merina Willemse aid yesterday. “As long as interest rates remain fairly high, we can still attract investments.”

Trade suffers

Any further weakness in the current account would be negative for the rand, Citadel Investment Services economist Salomi Odendaal said. Trade was “suffering” because of mining output problems, she said. “It is not good news for the trade account and the current account.”

Standard Bank was expecting a drop in platinum output, particularly for the second quarter of this year, the banks’ head of macro research, Thabi Leoka, said.

“Our outlook for 2013 remains bleak. We expect the impact of the mining strikes in the third and fourth quarters of 2012 to further drag down mining output in the first half.” – Bloomberg