CAPE TOWN - One of the strangest notions I came across last week was the government instruction to only allow certain manufacturers to use only 50percent of their workforce during the new Phase 4 of the Covid-19 lockdown.
Modern manufacturing is based on producing a certain number of widgets over a certain period, which then results in a widget produced at a certain cost.
A certain number of people is required to produce them, if only to monitor computer screens for increasingly mechanised production lines.
If there are less people than what is required, then either the production line is interrupted, which increases the cost of the widget, which the producer in turn then can’t sell; or the product ends up not being produced properly, which means it can’t be sold either.
Manufacturers compete globally, so I can say with certainty that if there was any way a manufacturer could produce the widget with only half the staff complement, the said manufacturers would have done so a long time ago.
And just imagine if that manufacturer did produce his widget on time, at the right price, with only half the staff The other half are certain to be retrenched.
One listed manufacturer to benefit from the lifting of restrictions in the Phase 4 lockdown is Pretoria Portland Cement, which told the market on Thursday most of its operations were in some way impacted by the Covid-19 crisis, and its key South African business made almost no sales in April.
Cement and construction materials businesses are allowed to ramp up production using up to 50 percent of employees at a plant in Phase 4 of the South African lockdown. Public works civil engineering and key construction maintenance projects will also be allowed to resume.
Investors, however, did not seem convinced of the good news, and the share price was down 3.05 percent to R1.27 on Thursday morning. The share price is about midway between its 12-month high and low.
Construction activity might be at an all time low, but infrastructure development is key to the government’s plans to rebuild the economy in time.
Most commentators I read last week believe that while the lockdown was done for all the right reasons (to flatten the curve of the infection rate), the local economy is going to take some time to recover, even to pre-lockdown levels.
Recent surveys about the impact on small businesses are scary. A survey by the 22 on Sloane Start-up Campus company for instance estimates 55000 small businesses will have closed forever by the end of the lockdown. Vast swathes of informal sector activity are understood to have closed for good.
Fortunately big business, such as companies listed on the JSE, usually have the balance sheet strength and financial reserves to see themselves through a crisis such as this, and indeed, will also be mindful of keeping something in reserve to take advantage of opportunities that should arise.
However, SA-focused company earnings in 2020 are likely to be lower than 2019, which is reflected in the current low share prices, hence the JSE average price:earnings ratio was only 10.4 on Thursday, well down from 14.9 at the beginning of the year.
Two local banks featured among the top five share moves on Thursday. Nedbank was up 4.58 percent to R107.03, while Absa Group rose 4.37 percent to R90.37. These were two banks that paid dividends in April. In spite of the Reserve Bank advising the banks to preserve their liquidity by not paying out dividends.
Local banks are shouldering much of the financial burden of providing financial relief to consumers by assisting their customers through the Covid-19 crisis.
Nedbank was first among the banks to indicate what this impact might be. By mid-April, it received more than 130000 applications for financial relief on car, home and personal loan repayments, of which it had approved 65 000 by April 21. This represented a small percentage of its more than 8 million customers.
Investors globally have swarmed into so-called safe haven investments.
For instance, the World Gold Council’s latest gold trends report said first quarter inflows into gold-backed ETFs saw a seven-fold increase amid the global financial market uncertainty, while the US dollar/gold price reached an eight-year high.
This and the rand devaluation has made local gold miners a favourite among investors. Consider that Sibanye Stillwater, the gold and platinum group miner, was trading at R37.96 on Thursday, more than double the R16.53 that it sunk to during the March global financial market meltdown.
Thursday’s price was at a price:earnings ratio of 95.2, which at any other time might seem an outrageously expensive price for the share.
RCL, South Africa’s biggest poultry producer, was among the top movers on Thursday, rising 4.17 percent to R9.99. This share price is not much lower than the R9.55 on January 3. RCL’s earnings slumped 61 percent last year, but higher import tariff protection should prevent any further margin disruption.
This tariff increase, according to the Emerging Black Importers and Exporters Association of South Africa, has pushed up the price of a 2kg bag of in-bone chicken from R129 to R162.25.