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Update No: 04 - (07/05/02)

Privatisation
The proposed deal between feeder airline SA Airlink and Air Namibia to privatise the cash strapped Namibian national airline has been dealt a severe blow after one of its partners pulled out of the deal. Labour Investment Holdings (LIH), which is owned by the National Union of Namibian Workers and which was to have a 10% share in the new airline, has pulled out following its members opposition to the move. SA Airlink would have been Air Namibia's biggest shareholder with 40%, while local aviation company Comav was to have a 15% stake and the airline's employees 10%. The union has been grappling with the issue of privatisation. Its recent acceptance of the 10% shareholding came as a shock in the wake of worker opposition to privatisation

Foreign-investment
The American Chamber of Commerce has endorsed the South African government's proposed integrated manufacturing strategy, which it says will be an important step in building the country's economic future. In the April 29th submission, the chamber's executive director, called on government to continue making South Africa an attractive investment destination. She said that, of the targeted sectors identified in the strategy for concentrated attention, four had already attracted big foreign investments, particularly in the case of US businesses namely metals and minerals, automotive and transport, chemical and biotechnology, and knowledge intensive services.

Trade-and-Export
After the massive depreciation of the country's currency at the end of last year, much attention will be paid to domestic trade balance figures for March. Merrill Lynch forecast a surplus of R2bn compared with R4.3bn in February, as it expects exports to perform strongly as a result of the improved competitiveness caused by the rand's depreciation as well as rising commodity prices. They comment that "As the year progresses, we expect more manufacturers to focus on export opportunities. This should see continued growth in the value of exports," Domestic retail sales figures for February, due out early May, are expected to mirror last year's strong performance before they stalled in January with zero-growth month on month, although healthy at 5,5% when measured year on year. In line with its expectations for weak domestic demand this year, Merrill Lynch expects retail sales to come under further pressure as the year progresses.

Steel
The cloud of US steel protectionism may have a silver lining for South African exporters such as Iscor and Highveld, which are already cashing in on major price hikes in the US steel market. New research by British analysts Meps Europe suggests that while the European Union (EU) is up in arms over the imposition of tariffs of up to 30% on European, Asian and Latin American imports by the US, those developing nations exempted from the US sanctions may stand to do very well. Steel prices have shot up in the American market, with rises of 40%. Meps suggested the prices have risen so high that EU and Japanese steel producers can ship their product to the US market, pay the 30% tariffs, and still make a worthwhile return. However, the real benefit could accrue to those countries such as South Africa, which have been exempted from the tariffs. South Africa was exempted from the new tariffs because its share of the US market was relatively small. "Mills in South Africa, India and Turkey are seeking opportunities for new outlets in the US at greatly enhanced price levels. Meps warned that Iscor and other producers from developing nations should be vigilant in keeping their exports to the US below 3% of total US imports for the product in question as if they go over the 3% level this could trigger tariffs. South Africa should be careful to moderate its exports, taking advantage of high prices but avoiding the threat of new protectionism. The weak currency will help make steel exports even more competitive, and South African steel makers could have a very good run.

Gold 
The Johannesburg Stock Exchange's gold index broke through the 3000 level April 22 for the first time since August 1998. James Wellsted, gold analyst at JP Morgan, says gold has now well and truly consolidated at around $300 an ounce. "And $307 is the next resistance level," he says. The recent run that has seen bullion breach $300 an ounce is good news for South Africa, says Gold Survey 2002. While gold prices were well placed to rise this year, due mainly to investors' desire for a shelter from uncertainties ranging from tension in the Middle East to Japan's banking crisis, the market remained "delicately poised", a mining consultancy said yesterday.

Telecommunications
While there was a marginal decline in percentage terms in information technology investments in 2001 by private equity firms, the telecommunications sector saw a large jump. According to the latest private equity survey by KPMG and the South Africa Venture Capital and Private Equity Association (SAVCA), telecoms accounted for 15% of new investments in 2001, from 6% in 2000. IT investments fell to 16% from 18%. The survey finds that total funds under management came in at R35.3 billion, up marginally from R34.7 billion in 2000. And the 2001 figure is inflated to the tune of R1.4 billion, due to the depreciation in the rand's effect on the foreign investor portion of the funds, says Nick Matthews, KPMG's senior manager of corporate finance. KPMG says the increase in telecoms was largely due to the conclusion of the second largest private equity deal of the year, Ucingo's R600 million investment in Telkom. There was also a R120 million expansion capital deal for Mobile Cellular, the sixth largest transaction in the year.

Rand
The long-suffering rand may finally be poised for a sustained reversal of its fortunes, according to a small number of mainly foreign institutions. But many domestic analysts, still shaken by its 37% plunge against the dollar last year, appear sceptical that the recovery seen so far this year will last. The rand, one of the most traded emerging market currencies, has been dogged by negative sentiment for nearly two years, but the optimists believe it could end the year stronger than it is now. Goldman Sachs predicts the rand will end the year at R10 to the dollar, firming to R9.60 by the end of the first quarter of next year. The rand has clawed back nearly 28% of its value against the dollar since it hit a record low of R13.85 on December 20, following a steep slide in the final weeks of last year. So far this year, it has firmed by 8.7% against the US unit and nearly 10% on a trade-weighted basis. However, some analysts point to rising inflation and interest rates, relatively sluggish economic growth and concerns that Zimbabwe's political and economic crisis may grab world headlines again, as reasons to be wary of further gains. But others believe a global economic recovery, and a weaker dollar and rising commodity prices will all buoy the currency, along with South Africa's sensible fiscal and monetary policies and the likelihood of significant privatisation revenues this year. Furthermore, a gradual loss of overseas interest in Zimbabwe's woes and President Thabo Mbeki's U-turn on AIDS policy helped remove two big stumbling blocks for capital inflows.

HIV/AIDS
President Thabo Mbeki and his cabinet have at last backed off from their controversial stance on anti-retroviral drugs, with a high-powered government delegation announcing before journalists April 17 that the health department is working on a universal roll-out plan of nevirapine. In a first admission of the efficacy of the drugs, Health Minister Manto Tshabala-Msimang read from the executive's statement: "Cabinet noted that they (anti-retrovirals) could help improve the conditions of people living with AIDS if administered at certain stages in the progression of the condition, in accordance with international standards." The cabinet's statement takes prevention of mother to child transmission therapy further. Furthermore, government will "investigate the possible production of generic drugs" Former president Nelson Mandela said on April 22 that he was relieved that the South African government had changed its policy on HIV/Aids. "These are responsible people who could not allow babies to continue to die," The government's about-turn on the use of anti-retroviral drugs will be a welcome relief for South Africa's foreign missions. The government's attitude towards the treatment of AIDS, along with Pretoria's attitude towards the problems in Zimbabwe, had become "the main two" issues giving South Africa's diplomatic corps a hard time in their host countries. The decision to open the door on the provision of anti-retroviral drugs for people infected with HIV, and to offer the drugs to rape victims may have been due to a genuine change of heart among senior cabinet ministers, or perhaps it was in response to foreign leaders, dismayed at the continuing spread of the disease and the confusing messages from President Thabo Mbeki.

Angola
As Angola's peace process begins to take shape, South Africa's business community is beginning to eye the opportunities that could emerge as the mineral-rich neighbour rebuilds after close to three decades of civil war. "It all depends on what happens in the next few months," Angola researcher Neuma Grobbelaar at the South African Institute of International Affairs said. "Business is certainly looking at Angola with huge interest, but would probably want to see a lot more movement on the political front before committing themselves." The death of UNITA leader Jonas Savimbi earlier this year cleared the way for the signing of a peace agreement on April 4 between the government and the rebel movement. Under the terms of the accord, UNITA agreed to the demobilisation of its troops as part of a political settlement that would culminate in elections within two years. A sustainable peace could allow Angola to realise its potential as a regional economic powerhouse. South African businesses had their fingers burnt in 1992 when they rushed into Angola on the back of a peace deal that collapsed in the wake of UNITA's electoral defeat. This time they are adopting a more wary response. However, Angola's long term investment potential is vast. Its oil industry, which supplies the United States with five percent of its domestic demand, has helped Angola consistently attract the largest slice of foreign direct investment of all southern African countries in recent years. Pretoria's relationship with the Angolan government has been strained, but according to economist Tony Twine, Angola's revival would help South Africa and the rest of the Southern African Development Community (SADC). Angola lies at the heart of the region. Resuscitated transport networks such as the Benguela railway corridor linking the Democratic Republic of Congo and Zambia to Angola's ports could act as a spur to SADC growth and integration.

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BANKING

Nedcor to make a friendly bid for BoE

NEDCOR is finalising a friendly bid to take over BoE in a deal which could create South Africa's largest banking group, with assets of more than R220bn and a market value of about R38bn. 
'Business Day' learned that an announcement could be made very shortly, after weeks of speculation about a deal between the two banking groups Talk that BoE was a takeover target began in March after the government issued an open-ended guarantee of BoE's R46bn deposit book in a move to end the liquidity crisis at the bank, the smallest of SA's "big six". 
BoE had been hit by a crisis of confidence in the sector following the curatorship of smaller Saambou, which the authorities had declined to rescue. 
BoE, which also sold its R12bn home loan book to FirstRand to raise cash, has since seen its liquidity position improve. But the government guarantee on its deposit has caused uncertainty, because of concerns about what might happen when it is lifted. 
A Nedcor takeover would give the government a way to unwind the guarantee without exposing BoE to the risk of further liquidity trouble. It is unclear whether the Nedcor deal involves the immediate lifting of the guarantee. But Nedcor, which has a strong parent in 53% shareholder Old Mutual, would be in a position to take on the risk. It is likely that the finance ministry, which has to approve all banking mergers, has indicated already that it will give its blessing to a friendly Nedcor-BoE deal. 
This would be in contrast to Nedcor's unsuccessful bid for rival Standard Bank Investment Corporation (Stanbic), which was blocked by the authorities in 2000 partly because it turned hostile, but also because it would have reduced competition in the banking sector. 
Nedcor pitched its merger bid for Stanbic almost three years ago as a move to take advantage of the cost benefits to be gained from economies of scale in banking. It has continued to be keen on an acquisition that would consolidate the sector and boost its own future earnings prospects. 
But no SA bank was likely to launch another big bank merger bid in the face of the finance ministry's apparent disapproval. If it is approved, the Nedcor-BoE deal would be the most significant move to consolidate SA's banking sector in more than a decade, reducing the number of big banks from six to five. 
Nedcor is likely to offer shares rather than cash for BoE, as it did when it bid for Stanbic, and may be aiming to do the deal at market prices rather than at a premium - just as in the abortive Stanbic bid. 
Though BoE's share price was hit hard by its troubles earlier this year, it has recovered from its mid-March lows, gaining 24% since the beginning of April. But its market capitalisation, at R6,9bn, is still little more than a quarter of Nedcor's R31,5bn. 
Reserve Bank figures show BoE had assets of R59bn at end-January, giving it a market share of just under 6%, while Nedcor had assets of R144bn, giving it a market share of about 14%. To this could be added R26bn of assets in Nedcor's 85%-held subsidiary, Nedcor Investment Bank (NIB). Together a merged group would be bigger than Absa, which has R206bn of assets.

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DEFENCE INDUSTRY

Defence industry is aiming for the top

Mid-April brought two interesting developments for the defence industry. Denel's Eloptro division signed a R62m agreement with Zeiss Optronik of Germany to co-design and produce periscopes for the SA Navy's new submarines and for export to Greece and South Korea; and a German team arrived at Denel's Overberg Range to test the new Taurus stand-off weapon, 'Business Day' has reported.
What is interesting is that SA's defence industry is taking another step into the top end of international defence development and manufacture.
This also means the industry will gain access to new technologies and markets, and the SA National Defence Force will benefit from more focused research, development and the industry's strategic independence.
These developments are mainly an outcome of the defence packages. Before the process began, SA's defence industry was able to develop and produce interesting and effective equipment, even in demanding fields such as guided missiles. But there was always doubt whether it was not like other smaller industries that look good but whose equipment does not really work, or is not as advanced as it looks, or is a copy of something else.
That changed when some of the major European defence companies came to SA to investigate defence industrial participation demanded by government under the packages. Many European executives and engineers were surprised by an industry that was as capable as it looked from outside, and that had breadth and depth of technology an industry with companies they could not only work with on the SA projects, but could also draw into their own research, development, design and manufacturing programmes.
The outcome of that quick education has been a number of alliances between SA and European defence companies, including some such as EADS, which did not benefit greatly from the packages. Denel, SA's largest defence company, is the main beneficiary, with several divisions winning valuable export work.
For example, Denel Aviation has an agreement with Agusta to manufacture helicopters for certain markets which could be worth $30m a year, and is manufacturing 20 A109 airframes for the Swedish Air Force. Denel's PMP has an order from Royal Ordnance for brass ammunition components worth R225m over five years.
Among private defence companies, Grintek has seized opportunities created by the defence industrial participation programme, establishing alliances with SAAB in avionics and electronic warfare, EADS in communications and with German antenna specialist, Kathrein.

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ENERGY

Prospects for petrochemicals hub in Durban

A multibillion rand petrochemicals hub in Durban, linked to the city's existing oil refineries, is one of the main projects that a new investment agency for KwaZulu-Natal is working hard to make a reality, 'Business Day' has reported. 
Trade and Investment KwaZulu-Natal chairwoman, Manana Nhlanhla, announced that as well as the petrochemicals plant there are plans for Mondi to build a R1,5bn factory to produce textiles from pulp, and for a Chinese investment of R300m in a microcrystal glass factory. 
She was attending a media launch in Gauteng for the group, at which she suggested that her province could become "the premier investment destination and a leader in the export trade". 
An oil industry analyst said that the possible development in Durban of a petrochemicals hub had been under study by chemicals firm Polifin before its acquisition by Sasol, and that the idea was still viable. 
The analyst said the key to any such development would be the building of a cracker a plant to turn feedstock from the two Durban refineries into the raw material for plastics and other chemical products. 
"The problem is that this would require a very big investment, on a scale which would only come from Sasol or the big multinational oil companies," said the analyst. 
"The big question is whether there is enough local demand for the output from a cracker, but my impression is that this would be a good project and we are talking not about whether it will happen, but when." 
The CEO of the oil industry association Sapia Colin McClelland would not comment in detail on any specific investment in Durban, but did confirm that there was interest in his industry in expanding beyond refining into petrochemicals. 
A spokesman for Shell said the company would support moves to develop a petrochemicals industry in Durban, although he could not say where the investment might come from, or on what scale it might be. 
An oil industry executive suggested that a major challenge in any potentially polluting investment in Durban would be to win the battle against environmental groups, who have been critical about the pollution records of the refineries and existing chemicals operations in KwaZulu-Natal.

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FOOD & DRINK

Focus on competitive advantages will boost local wine industry sales

It is trite to suggest that the South African wine industry should be seeking competitive advantages in its drive to expand foreign sales. Export volumes have increased eight-fold over the past decade to almost 174-million litres last year.
According to Wines of SA, this represented annual growth of 24%, three times that of the previous four years, so the industry must be doing something right.
Producers have moved quickly to ensure consistent quality, a factor that was neglected by some in the rush to maximise volumes; considerable resources have been put into innovation and research, and the industry has been ruthless in uprooting old vines to make way for new plantings of the mainly red varietals demanded by the international market.
In 1990, only 16% of SA's vineyards were planted to red grapes, a figure that is now closer to 40%, and red wines accounted for almost half of last year's exports.
All of this points to continued strong growth in the coming few years, but it is not enough, getting the basics right is essential if you are to stand a chance against the top teams. But this amounts to playing catch-up, whereas to win consistently requires something special, an innovation your opponents either have not thought of or cannot replicate.
In the case of the Springbok wine team that special something could turn out to be terroir-based production, a focus on the unique growing conditions that exist in specific geographical areas, some of which may be as small as a single vineyard.
In truth, the terroir concept is no innovation. What is new is the realisation that this can be turned to competitive advantage in the modern international market, where the demand is for premium quality wines, the origins of which can be identified by their complex characteristics.
Addressing a seminar on the future of the SA wine industry held at Nederburg, connoisseur Neil Pendock noted that the concept of terroir was being punted by René Renou, the head of the body that controls the appellation system in France, as "a defence against the inroads made by the new world into traditionally French export markets".
This might be a useful weapon when confronting most new world producers, like California and Australia, but it is here that SA has a competitive advantage.

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MINERALS & METALS

De Beers asks Russia to back Alrosa deal

De beers' managing director, Gary Ralfe, has asked the Russian government to help support the diamond trade agreement which De Beers signed with Alrosa, the Russian diamond miner, last December. 
In the deal, De Beers promised to buy $800m worth of Russian rough per annum for five years. This represents roughly half of Russia's annual diamond production. The export agreement is the precondition a syndicate of European banks has demanded before they will issue new credits to Alrosa. 
The European Commission in Brussels is currently reviewing whether the terms of the deal with De Beers comply with European Union anti-monopoly rules. 
The commission is still assessing De Beers's proposal of the supplier of choice marketing strategy, in conjunction with the planned joint venture with LVMH to market De Beers branded diamond jewellery. 
Ralfe met Russian Foreign Minister Igor Ivanov, as well as the government's chief diamond policymaker, Valery Rudakov; and the newly appointed chief executive of Alrosa, Vladimir Kalitin.
Kalitin, who headed the company's engineering operations until his promotion, made his first public appearance recently to discuss Alrosa's past-year results. He said production totalled $1,67bn in 2001, up 3% on the year earlier. Sales totalled 1,74bn, including $131m in sales of polished diamonds by De Beers's joint venture with Lazare Kaplan of New York and other partners. 
Kalitin said the company plans to move swiftly after a feasibility study of its Lomonosov deposit in Arkhangelsk is finished shortly. 
He said initial production from Lomonosov will reach the market by 2004. Alrosa acquired its stake in Lomonosov in 2000 from De Beers, which acquired it in the mid-1990s. 
A legal challenge to De Beers' stake, for which the company paid more than $20m, has been mounted recently in London by Russian entrepreneur, Andrei Chuguyevsky.

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