News in South Africa 18th September:
1. Transnet costing economy R1bn daily:
Last week, the Durban Chamber of Commerce and Industry called on Public Enterprises Minister Pravin Gordhan to remove Transnet CEO Portia Derby and other key executives, claiming their lack of service delivery is sabotaging business.
This is the latest broadside against the state-owned logistics and ports operator, which is reckoned to be costing the country R1 billion a day through inefficiencies – equivalent to 5% of GDP in 2023, according to research by the Gain Group.
This is not the first time business has called for heads to roll at Transnet. In December 2022, a leaked, confidential letter from the Minerals Council SA similarly called for Derby’s removal, as well as the head of Transnet Freight Rail, Sizakele Mzimela.
This was followed by a joint statement from Transnet and the Minerals Council emphasising their efforts to solve the rail and ports issues that had throttled miners’ ability to get their commodities to port.
These efforts included the formation of cooperative forums comprising the Minerals Council, mining houses and Transnet, intended to iron out operational inefficiencies and improve throughput.
Based on the Gain Group research, it’s hard to see whether these efforts have had any positive impact.
In July, Gordhan announced nine new appointments to the Transnet board, including Minerals Council vice-president Andile Sangqu as chair – a logical choice, as the mining sector is Transnet’s biggest customer.
The Minerals Council estimates inefficiencies at Transnet may have cost the country R150 billion in lost sales in 2022. That figure has clearly risen in 2023.
Lost coal sales due to Transnet inefficiencies amounted to 22Mt (million tons) in 2022, a figure that will rise to about 30Mt in 2023, according to the Gain Group. Forex losses amounted to R88 billion in the coal sector alone in 2022, with a further R174 billion in foregone economic activity.
In terms of freight volumes, Transnet is back to where it was in the Second World War, while countries like India and China have experienced massive increases in both infrastructure and volumes.
The chamber’s letter comes just weeks after Transnet announced a R5.7 billion loss for the year to March 2023, a more than R10 billion reversal from the R5 billion profit announced in 2022.
The taxpayer is required to underwrite these losses and Transnet’s loan book – with no clear evidence of sustainable recovery.
2. SARB interest rate announcement this week:
Economists are optimistic that interest rates will stay on hold this week – but there are still some risks that the Reserve Bank might factor into the decision.
The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) will be meeting this week to vote on the next step forward for interest rates in the country.
Following the MPC’s penultimate meeting for the year, the committee will make its announcement on Thursday (21 September).
While Reserve Bank governor Lesetja Kganyago kept the door wide open for more interest rates hikes in the country following the MPC’s last meeting, sentiment around rates has shifted significantly among analysts and economists.
Following July’s hold on rates at 8.25%, the market was still weighing a call that the hike cycle had officially ended against a possible further hike of 25 basis points.
However, inflation data published in August (for July) saw CPI fall more than expected to sit comfortably within the SARB’s target range of 3%-6% – a position it needs to retain for the MPC to stop the hike cycle.
This led to a big turn among fund managers and economists, where both groups felt more comfortable calling an end to the hike cycle.
Economists are still optimistic that the Reserve Bank will continue to hold on rates this week, but it’s not all smooth sailing.
The Bureau for Economic Research (BER) noted that inflation is likely to be under pressure in the coming months due to higher fuel prices and other factors – such as the return of high stages of load shedding.
Despite these pressures, however, the group believes that the SARB will look past the short-term pressures (especially for September and October) and keep rates at 8.25%
Economists at Nedbank and Investec have a similar view.
3. Food prices remain high:
SA’s competition watchdog still believes food is pricier than it should be – due in part to large profit margins among retailers and producers, along with a lack of competition. However, there is also some recognition that the cost of load shedding is keeping prices high, even as global food costs fall.
In the Competition Commission’s latest report on essential food prices, it finds that the price of bread, maize meal and cooking oil are not cooling as fast as the sharp decline in global commodity prices.
For example, global bread and wheat prices had fallen by about 10% during the first quarter of the year, South African producer and retailer prices for bread had risen 3% during the same period.
The report found that producer prices have been falling for much of 2023. But these lower producer prices have not fully translated into lower prices in shops. This indicates that retailers are not passing through all cost reductions:
As a result, the retailers’ share of retail prices reached a historically high level while the producer share has been historically low.
In an analysis of meat prices, for example, it found that weaner calf prices had fallen substantially this year, which had also led to lower prices for beef carcasses as well. However, the commission noted, the retail price for beef cuts had not declined this year. Retailers now earn 40% of the shelf price of beef, the highest share since January 2021.
The commission points out that local retailers’ profit margins remain higher than in countries like the UK and Ireland.
“We notice that local retailers are much more profitable than their counterparts in these countries,” the commission says in its report. “This could be due to various factors, including differences in the level of competition. Additionally, in some markets like the UK, retailer margins are decreasing as discounters gain prominence, while in South Africa, margins increased between 2019 and 2022 before a recent decline primarily attributed to load shedding costs.”
Shoprite alone spent more than R1.3 billion on load shedding expenses in a year.
The weighted profit margin for South African retailers went from 5.6% in 2020 to 6.0% in 2022. It has fallen to 5.3% in 2023.
Shoprite’s profit margin grew from 2019 to 2022, but has returned to where it was in 2019. Woolworths has fallen consistently since 2020, the commission notes. Pick n Pay’s profit margin has remained stable since 2021.
Source: Competition Commission data based on annual financial statements of Pick ‘n Pay, Shoprite Holdings, Woolworths Holdings, and Spar Group. Notes: We use self-reported trading margins for Shoprite’s Supermarkets RSA Division; Pick ‘n Pay is calculated using group trading profit over revenue; Woolworths is calculated using food profit before tax over food revenue; Spar is the self-reported group operating profit margin.
But its analysis also shows that profit margins earned by bread and maize meal producers continue to grow in 2023.
4. SARS tax clampdown:
The South African Revenue Service (SARS) is clamping down on tax avoidance and evasion through complex company structures.
The latest intervention is to force all South African companies and close corporations to register their beneficial owners with the Companies and Intellectual Property Commission (CIPC).
SARS Commissioner Edward Kieswetter explained that it is important to see who benefits economically from company ownership.
He said the Financial Action Task Force (FATF) highlighted the importance of connecting legal ownership with beneficial ownership.
“Very often, rich families put their wealth in companies or legal entities which mask the fact that the family is the true beneficiary,” he explained.
“They place it one or two steps away from themselves to mask the fact that the family is the true economic beneficiary.”
Establishing beneficial ownership is, therefore, key to linking money flowing through companies or other legal entities to the people who benefit.
As such, the CIPC has started implementing a beneficial ownership regime.
Under this regime, any individual or entity holding more than 5% beneficial ownership of a company or close corporation must submit the beneficial owner’s information to CIPC.
Beneficial interest, when used in relation to a company’s securities, means the right or entitlement through ownership, agreement, relationship or otherwise.
The CIPC previously explained that the beneficial ownership register aims to establish a repository of natural persons who own or exercise control over legal entities.
This will assist law enforcement and SARS with relevant information regarding their investigations of who the ultimate owners of an entity are.
“With the implementation of the beneficial ownership register, customers will be required to report to the CIPC information regarding beneficial owners of companies,” it said.
CIPC Commissioner Rory Voller said they are committed to working with other regulators and financial institutions to mitigate against risks.
5. Power grid improvements:
Minister of Electricity Kgosientsho Ramokgopa reported a slight grid improvement following a week of severe bouts of load shedding.
The country was subjected to stage 6 power cuts for some of the week due to the failure of generating units.
On Sunday, Ramokgopa announced the return of a generating unit at the Kusile Power Station, reducing load shedding by one stage.
But he said they would continue with planned maintenance.
“I really want to congratulate Mr Nxumalo. This is a date that they had set for themselves. Thank you very much to Mr Nxumalo, and thanks to the team. Unit 4 is back online, so essentially, we are getting 800 megawatts.”
All information sourced from articles posted by: Moneyweb, BusinessTech, Fin24, DailyInvestor, and EWN.
