Economy In 2020
By: Christie Viljoen – PwC Economist
After slumping in 2019 to the slowest rate of growth (3.0%) since the global financial crisis, the global economy is forecast to grow by 3.4% in 2020. In the October 2019 edition of its semi-annual World Economic Outlook (WEO), the International Monetary Fund (IMF) said it expected more robust growth from non-commodity exporters in 2020 while the performance of commodity exporters was projected to remain lacklustre.
However, the multilateral organisation also warned that the growth forecast for 2020 was precarious, tilted towards downside risks to the outlook. These include trade barriers (US vs China) and heightened geopolitical tensions (e.g. Brexit) that could further disrupt industry supply chains and hamper business confidence and investment implementation.
On the mining front, the World Bank has warned that metal prices are forecast to decline by 1.4% in 2020 due to expectations of subdued global industrial demand. For example, aluminium demand is under pressure from large overcapacity in China, while industrial demand for copper is being dampened by concerns over the health of the global economy.
Weak global automotive sales are weighing on prospects for lead: three-quarters of global lead demand is to produce vehicle batteries. In the October 2019 edition of its semi-annual Commodity Markets Outlook, the World Bank warns that this already lacklustre outlook for metals also faces risks to the downside. A larger-than-expected global downturn – i.e. the weakness in 2019 carrying through to 2020 – would further dampen industrial demand.
Not surprisingly, PwC’s Mine 2019 report found that global mining stocks have failed to keep pace with that of equity markets overall. Mining companies certainly do not measure their success based solely on their share price performance. Nevertheless, the share price movement relative to the rest of the market is an indication of the market’s view of the industry’s attractiveness.
Investors seem concerned about mining’s negative publicity, the future of certain commodities and the industry’s ability to manage stakeholder expectations. PwC believes that the under-performance relates to the risk and uncertainties of a changing world and the market perception about the mining industry’s ability to respond.
Mixed outlook for South African economy and mining
South Africa is not isolated from these global challenges. But despite the increased risk of operating in the country (see below), South Africa is often looked at as a commodity and macroeconomic hedge by benefiting from a weaker rand in times of trouble – with most producers recognising dollar-based revenues against rand-based costs.
The IMF commented in October that economic growth in several BRICS countries – inducing Brazil, Russia and South Africa – declined sharply in 2019 due to idiosyncratic reasons, but that growth was expected to recover in these economies during 2020. The IMF expects South African growth to accelerate from 0.7% in 2019 to 1.1% in 2020 on the back of an anticipated 3.1% increase in the volume of goods exported.
But to be honest, the forecast improvement in South Africa’s growth during 2020 is nothing to get too excited about for miners. While the finalisation of the third version of the Mining Charter will allow producers and investors to become cautiously optimistic, PwC’s SA Mine 2019 report identified a slew of other economic challenges that will hold back the minerals sector in 2020. These include rising input costs, capacity constraints at Eskom, labour disputes, skill shortages, and declining resource grades.
In response to the domestic and international economic climate, the South African mining industry will in 2020 continue transitioning from a deep-level, labour- intensive, conventional mining environment to a mechanised, shallower, technologically advanced industry. Alongside this change, safety is also improving: mines are reporting fewer fatalities and a reduction in the lost-time injury frequency rate.
A risky mining jurisdiction to do business in PwC’s Mining Risk Index incorporates elements of overall policy attractiveness, operational environment challenges, surveyed risk perceptions, as well as regulatory factors. The latest available data from the Fraser Institute, Fitch Solutions and MiningJournal enabled the calculation of the aggregate index for 31 countries. (A higher score indicates lower risk.)
From a regional perspective, Europe and North America are the least risky places for resource companies. South Africa is ranked 20th out of 31 countries in the index with a score of 54.37 out of 100, placing it slightly behind BRICS member Brazil (54.53) and only marginally ahead of African copper giant Zambia (54.36).
The Fraser Institute Annual Survey of Mining Companies 2018 (published in 2019Q1) noted recent improvements in policy perceptions among South African respondents, reflecting decreased concern over uncertainty regarding protected areas, the taxation regime, as well as regulatory duplication and inconsistencies. This is good news with the eye on 2020.
Nonetheless, the president of an exploration company was (anonymously) quoted in the Fraser Institute survey report as saying that the rules around mining ownership discourage investment. The vice president of another exploration company commented (also anonymously) that the revised Mining Charter continued to be a deterrent for exploration companies.
Apart from this, other general operational environment challenges in the country that contribute to South Africa’s disappointing ranking in PwC’s Mining Risk Index include policy uncertainty, intermittent power supply, and the high cost of labour (as a percentage of total costs). There is little scope for this to change during 2020.