Ideological politics can (and should) be debated all day long. This isn’t about whether you lean left or right in your political beliefs. Instead, this is about the price of failing infrastructure and how state-owned entities are objectively letting us down — in a big way. In a country with a high unemployment rate and such tepid economic growth, despite abundant natural resources and talented, hardworking people, it’s difficult to watch what’s going on.
Sens is a wonderful source of information (and truth) about the ground-level realities of doing business in South Africa. You’ll be amazed by how much you can learn from working methodically through not just the announcements, but also the more detailed presentations and reports that accompany the results as well. There’s an increasing trend of corporates saying it is about operating conditions. Instead of political spin, you get the real story from those who are out there paying taxes and trying to create jobs.
For example, had you been reading the news from companies such as Thungela and Kumba Iron Ore over the past couple of years, you would know of the troubles at Transnet Freight Rail. It’s a huge disservice to our economy, with the private sector having to step in to try to improve things. At a time when export coal prices were through the roof, we couldn’t get the full benefit because of inefficiencies in both the railways and the ports. Anyone who has followed a commodity (pick one, any one) for a few years will know that the cyclical nature of these markets can be brutal.
Maximising the upswing is critical to overall investment returns, as investors assume that there will be bad times and great times in any mining business. Bad times and goodish times just won’t cut it. It breaks the investment thesis and forces investors to look elsewhere. Management teams then respond to shareholder pressure by looking for offshore opportunities for investment, rather than ramping up spending in the local economy. A perfect example is Thungela’s foray into the Australian market.
We need things to improve for not just our mining houses, but also the numerous companies that suffer knock-on effects from problems in exports
Still don’t believe me? Just look at Barloworld’s latest numbers. In the five months to February 2024, Equipment Southern Africa saw revenue drop by 4.9%, with machine sales down by 17.8% as mining customers pulled back on investment in their operations. For sure, some of this is due to downward moves in the prices of commodities such as platinum group metals. Things are never so simple that a single factor explains everything. The point is that we also can’t ignore the high likelihood that mining executives are simply less confident than they need to be in the South African infrastructure that supports their operations. As a country, we can never control the pricing of commodities. All we can try to do is create an environment that maximises profits over a typical cycle.
The problems go beyond just the mining industry. Barloworld gives another solid example of this, with the Ingrain consumer industries segment suffering a 5.2% reduction in revenue as exports came under pressure from issues at Durban harbour. Again, there were broader commodity pricing issues in this number as well, but the infrastructure certainly didn’t help. There are problems in Cape Town too, with just one example being export volumes at RFG Holdings. If exports are lower, there’s a negative impact on the paper and packaging industries as well. This does no favours for either tax revenue or job creation.
The happy winner in this failed infrastructure story is Grindrod, with the Maputo port doing extremely well. Great as that may be for Grindrod shareholders, it’s not good news for the South African fiscus and the people of this country. We need things to improve for not just our mining houses, but also the numerous companies that suffer knock-on effects from problems in exports.
I have one more example for you, courtesy of investment holding company Sabvest. With a 15-year compound annual growth rate (CAGR) in the NAV per share of 17.2% excluding reinvestment of dividends, the track record is incredible. Over five years, that CAGR is 13.3% — still highly respectable. Yet in 2023 the company suffered its first annual drop in NAV per share in 20 years. Exposure to Transaction Capital certainly did the fund no favours, but there’s a broader problem. Sabvest owns many private companies in South Africa that are exposed to all corners of the economy. If ever you wanted a single data point to highlight how critical structural reform is in our country, this is the one.
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