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Wage hikes put pressure on inflation

Spreading strikes in the mining sector and last week’s wage settlement at Lonmin’s Marikana mine will hit the economy with a double whammy in the months and years ahead. Lost production will erode gross domestic product (GDP) as long as the disruptions persist while further demands by miners for wage hikes in line with the 11 percent to 22 percent agreed at Lonmin will boost inflation.

Impala Platinum (Implats) workers who achieved increases ranging from 8 percent to 10 percent, plus some adjustments, following an illegal strike early in the year, are now making further demands. Implats spokesman Bob Gilmour said on Friday that workers wanted the same deal again.

Lonmin workers returned to work on Thursday after reaching a wage deal with the company - but Amplats miners in Rustenburg look set to make salary demands of their own. Credit: Associated Press

At Anglo American Platinum, miners went on strike last Tuesday and spokeswoman Mpumi Sithole said on Friday the company had no idea why.

Demands made in July included a R10 000 basic salary, a R2 000 living out allowance, a R500 clocking in risk allowance, a monthly safety bonus of R1 500, a transport allowance of R60 and a meal allowance of R30. A deal is now being brokered by the Commission for Conciliation, Mediation and Arbitration.

Workers at Goldfields’ KDC west mine near Carletonville are on an unprotected strike, demanding R12 500 a month. And miners at Anglo Gold Ashanti started an unprotected strike on Friday – their demands are uncertain.

The mining sector will be the immediate casualty of workers’ increasingly militant approach and their rising wage demands. Lonmin has said its wage bill will rise by about 14 percent from next month and analysts doubt the company can carry on without either a successful rights issue or cutting jobs.

Soummo Mukherjee, a senior credit officer at Moody’s Investors Service, warned last week that the Lonmin settlement “could set the tone for more aggressive wage negotiations by other unions in South Africa” and this, in turn, could have a negative impact on rated mining companies, as wages account for the single largest share of their total costs.

The prolonged strikes could lead to reduced production and lower cash generation, Mukherjee said. Without an equivalent reduction in costs, the trend would squeeze operating margins “and other credit metrics of rated mining companies with the greatest exposure to South Africa”.

In other words, troubled companies could face a credit downgrade which would increase their borrowing costs.

There are wider implications for the economy and for the country because the Lonmin workers’ illegal and often violent strike has apparently achieved far more for the workers than legal strikes organised by their unions.

The gains may be more than neutralised by future job losses, as the company struggles to survive in difficult times. But, meanwhile, a message has gone out to workers: create havoc and you will come closer to achieving your goals than you would if you go the legal route.

It is a socially and politically destabilising message, which undermines the credibility of established trade unions as well as of the government, accused of providing inadequate infrastructure in the area and criticised for its inept handling of the crisis.

As labour unrest spreads across the economy, weak growth will stall further. Implats lost 120 000 ounces of production due to the strike and a further 30 000 ounces of platinum were lost to the end of the financial year during the ramp up of production. The company said in total 150 000 ounces of platinum and associated metals were lost in the financial year to June.

The bulk of the production losses were reflected in a 17 percent contraction in mining GDP in the first quarter. The figure is a quarterly change, adjusted for inflation and seasonal factors, and multiplied by four to show an annual trend. Mining recovered in the second quarter, bouncing 31 percent off a low base. But the gains have been lost in a disastrous third quarter.

The output losses will reduce the volume of domestic exports at a time when the gap between income from exports of goods and services and the import bill is widening. The deficit widened from 4.9 percent of GDP in the first quarter to 6.4 percent in the second, according to the Reserve Bank quarterly bulletin.

Reserve Bank governor Gill Marcus said on Thursday the problems in mining could undermine “already fragile investor sentiment”. And she cut her growth forecast for the year from 2.7 percent to 2.6 percent having previously cut from 2.9 percent.

There is no indication how long the upheavals in the mining industry will take to run their course and what the final outcome will be.

The domestic dramas are unfolding against a threatening global backdrop. Growth in China, the engine of the global economy, is slowing more than expected. In the US growth is weak and in Europe GDP is shrinking. In other words, South Africa’s export markets are shrinking. On Friday the World Trade Organisation downgraded its forecast of world trade expansion this year from 3.7 percent to 2.5 percent.

This leaves little scope for mining or other companies to meet worker pay demands – unless they cut their work force.

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