After the Bell: Of 0.5% growth and my undue optimism

Sometimes two separate events occurring at the same time really reveal what is happening in our economy.

I think that happened today.

First, Merafe Resources confirmed to the JSE that it has taken the final decision to shut down two of its last ferrochrome smelters operating here.

This has been a long time coming. Merafe is operating its smelters at a loss because the cost of electricity is simply so high.

It says that despite negotiations with Eskom it simply cannot continue like this. As a result 3,000 jobs are going.

Then, at 11.30 this morning Stats SA released numbers showing that our economy “grew” by just 0.5% from July to September this year.

We have been complaining about our lack of economic growth and rising unemployment for so long that figures like this just roll over me.

I’ve become so used to bad news about the economy.

But I have to say I should probably be a lot angrier, because so much of this is about sheer mismanagement.

The government has known for ages that Merafe was going to do this – with smelters it has been one-way traffic since we first had load shedding in late 2007.

While we have primarily focused on the jobs lost each time this happens, there are other consequences.

Last week Eskom released its interim results showing that while it was charging 12% more for electricity as a result of a new tariff, this only increased its revenue by 4%.

One of the reasons for this is that its sales volumes were down 3%.

Eskom’s chief financial officer, Calib Cassim, confirmed on The Money Show on Friday that there are two major reasons that they are selling less electricity.

The first is because of those shiny panels that you see in every middle-class neighbourhood and on most petrol stations.

The other is... wait for it... because so many smelters have closed.

This issue of smelters and electricity and jobs has become very complex.

Electricity prices have risen while the prices producers get for what they produce have gone down. Of course they’re going to shut down the smelters!!

Something quite similar has happened in Mozambique, with a series of important economic consequences there.

Mozal Aluminium, the smelter run by South32, is likely to shut down next year, cutting more than 2,500 jobs. That’s because it has been running on power produced by the Cahora Bassa hydroelectric scheme.

The agreement that governs that runs out in March and so far no solution has been found.

To put Mozal in context, it is responsible for a full 3% – that’s THREE PERCENT – of Mozambique’s GDP.

Obviously the closure of Merafe’s smelters won’t be as big as that for us, but it will still be significant.

I do have a little bit of sympathy for the people who are trying to restructure our electricity system. It is devilishly complex with a large number of actors and technical elements to consider.

And there is currently a review of the system that creates the electricity tariff structure that we currently have.

But surely all of this should have been started years ago.

Now, of course, we are reaping the rewards.

For our economy to only grow by 0.5% really does seem to be proof that we are not even treading water, we are slowly sinking.

Having said that, as After the Bell has an Official Policy of Undue Optimism (except on Mondays) I should remind you that it is not all doom and gloom.

Strangely, there is a tiny bit of interesting news from an unlikely source.

In today’s GDP release Stats SA says the construction sector grew by 0.1%. That means nothing.

But, its Labour Force Survey released last month showed the number of people working in the construction sector grew by 130,000. That’s huge.

And, today’s GDP figures also suggest that gross capital formation was up 1.6%.

Add that to no load shedding, better logistics and all of the other changes and perhaps, just perhaps, a slight uptick in sentiment, and maybe things are looking up.

I do expect, given After The Bell’s official policy, that things will start to look up at some point.

What was that? Oh, you want to know which point?

Now, Dear Reader, that, I’m afraid, is beyond my power.

But take my word for it, things will turn.

One day. DM