Despite the low opinion many have of rating agencies, including Planning Minister Mr Trevor Manuel and US President Mr Barack Obama, Fitch Ratings says some things worth heeding.
Fitch believes rising inflation in Commonwealth of Independent States countries and sub Saharan Africa may lead to sustained cash cost increases per ton of iron ore and steel output. This will adversely affect the competitiveness of iron ore and steel producers in these regions in the medium to long term, when compared with global peers.
That is a concern for companies such as Kumba Iron Ore and steel maker ArcelorMittal SA. Indeed, ArcelorMittal SA's CEO Ms Nonkululeko Nyembezi Heita says raw material prices in recent years have created a structural erosion of margins, despite higher domestic prices. She also says the strong rand has badly affected steel export prices. Of all the problems the company faces, from its battles with Kumba over cheap iron ore and the government over mining rights, to a proposed carbon tax, the macroeconomic environment is the least controllable variable.
SA's economic and industrial policy gurus need to take such things into account when making policy, including the critical need to eliminate inefficient technologies and improve labor productivity. SA says it wants steel costs to be in the lowest quartile globally. But as Fitch says, in SA, generally higher energy costs and limited flexibility in managing workforce costs will lead to higher cash costs for local mining operations.
The world's biggest steel makers are highly consolidated resource companies, the big three control 70% of the world's iron ore market. But some customers have strong bargaining power, so margins are under downward pressure, making efficient development of the global steel industry difficult.
Mr Hennie de Clercq, executive director of the Southern African Institute of Steel Construction, said that companies tend to be discreet about such things as the effects of floods in Australia, which saw coking coal costs soar, and the effects of poor global economic conditions. But when it comes to quantifying the effect of rising labor costs and electricity prices, companies hold their cards even closer.
Fitch says average cash costs have increased steadily over the past 12 to 18 months across emerging market countries, driven by higher commodity prices and large annual increases in energy and labor costs.
Mr Roelof Steenekamp, a director in Fitch's European industrials team, said that "While the current high commodity price environment drives a large portion of these cost increases, which should partially correct when commodity prices decline, Fitch sees a structural shift in electricity, gas and labor costs, which may not adjust as quickly in a weaker price environment."
Fitch goes on to say that, historically, CIS mining companies had access to some of the cheapest electricity in Europe, with Ukraine’s electricity cost being the lowest. However, like SA, Ukraine’s electricity prices are rising after big investments in generation and transmission expansion. Fitch says that in Ukraine, a large electricity tariff increase of 15% was passed in April, with further increases of 15% to 20% expected this year and next. Russia is expected to follow suit.
Further, Fitch says total costs per ton of steel are expected to be adversely affected by Ukraine's inflation rate, which rose to 11.9% in July 2011, driving double digit labor cost increases over the next year.
In SA, electricity costs have already gone through the roof, and wage-increase costs have been double the inflation rate for some time. It is a vicious spiral and the poor suffer most. And that helps drive violent strikes and inflation.
The global mineral resource industry is highly cyclical, and companies typically rely on low operating costs at key mines for the sustainability of long term competitiveness. Unfortunately, many policy makers in SA are making this more difficult for companies, mainly because they put ideology ahead of sense.
(Sourced from www.businessday.co.za)
