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SOUTH AFRICA


  
  

 

In-depth Business Intelligence

Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 159,886 104,235 113,300 29
         
GNI per capita
 US $ 2,780 2,600 2,820 93
Ranking is given out of 208 nations - (data from the World Bank)

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Area (sq.km)
1,219,912

Population
43,586,097

Capital
Pretoria

Currency
rand

President
Thabo Mbeki


Update No: 044 - (31/08/05)

The first nation-wide gold miners' strike in 18 years, has followed the South African Airways (SAA) strike in July. Both have had distinctive features, in terms of the kinds of workers involved and the rhetoric behind the wage demands. The economy is growing and attitudes have altered. It is not only the relationship between profit and pay that has been cited by unions. The relatively new corporate practice of disclosing directors' pay packages has drawn attention to the disparities between raises offered to shop-floor workers and those granted to executives. This has given unions plenty of ammunition. With rising incomes have come expanding needs. In the context of the population as a whole many of the strikers were relatively affluent and middle class. The gold-mining houses began counting the cost of the strike August 11 after the unions formally accepted a revised offer of 6%-7% wage increases. The industry-wide strike, which began at midnight August 7, was reportedly costing the sector R130m in revenue, or 40000oz of gold, a day. SA accounts for 15% of global gold output and the sector contributes 2% to the country's gross domestic product.

The Police Special Investigations Unit known as the Scorpions conducted a raid on the home of sacked Deputy President Jacob Zuma. The home of his financial adviser, Schabir Shaik was also raided by the unit. Mr Zuma, due to go on trial in October on corruption charges, was sacked in June after Shaik was found guilty of corruption in deals linked to him. South Africa's main trade union movement Cosatu has reacted angrily to raids. Cosatu issued a statement describing the searches as a "full-frontal assault on the South African revolution". President Thabo Mbeki is facing a grassroots revolt over the removal of Mr Zuma. Cosatu has called for the charges to be dropped and Mr Zuma to be reinstated. Many union members see Mr Zuma as a champion of the poor and the unemployed, whose lives have not improved under President Mbeki, despite South Africa's continued economic growth. 

President Mbeki has called for a commission of inquiry into claims that he is attempting to discredit his former deputy Jacob Zuma. In a letter published on the website of the African National Congress (ANC), Mr Mbeki denied rumours that he fired Mr Zuma in order to sideline him. Zuma remains deputy president of the ANC and had been tipped to succeed Mr Mbeki as South African president. The formal alliance between the ANC, Cosatu and the South African Communist Party has become strained since the ANC took power in 1994. Cosatu sees Mr Zuma as a leader who represented the unions' interests within the ANC and in government. The unions have been buoyed up by a series of strikes, including the first strike by gold miners for 18 years and industrial action that brought South African Airways to a halt. The formation of a major new political movement on the left, bringing together the unions, churches and civic organisations, now seems inevitable. The crisis of unity in the African National Congress (ANC) deepened when President Thabo Mbeki came down hard on key backers of ANC deputy president Jacob Zuma during a meeting of the party's national working committee. Senior government officials have expressed concern about the growing Zuma groundswell. Privately, senior ANC sources say Zuma is fuelling suspicion of the legal process, telling supporters the law has been used to settle internal ANC scores.

President Mbeki officially appointed Minerals and Energy Minister Phumzile Mlambo-Ngcuka as his deputy, despite her being implicated in a party funding scandal that still could tarnish her promising career. Mlambo-Ngcuka is also married to former national prosecutions director Bulelani Ngcuka, who began the investigation that led to Zuma's firing in July. Mbeki seemed unmoved by perceptions among Zuma supporters that her appointment was linked to Zuma's downfall and her husband's role in it. Instead, Mbeki emphasized his commitment to increasing the participation of women in government. This appointment however, appears to threaten to undermine Mbeki's commitment to act strongly against corruption at the highest levels of government. The party funding scandal dubbed Oilgate, is being investigated by the office of the public protector, and Mlambo-Ngcuka's role is likely to come under the spotlight. While Mbeki's controversial appointment was roundly accepted by business, civil society groups and the opposition, it suggests that he is prepared to take the risk of possibly having to fire his deputy president again. 

Reserve Bank governor Tito Mboweni lashed out at the instigators of a "media frenzy" over claims of a proposed $1bn bale-out for Zimbabwe, saying no such loan had been discussed. This is the first categorical denial, from either the Reserve Bank or government, of such a loan, which is reportedly being negotiated in return for the fulfilment of certain conditions by the Zimbabwean government. Addressing shareholders at the Bank annual general meeting August 24, Mboweni said there had been discussions between South African and Zimbabwean officials. "But it's not true that these talks centred on $1bn, or that they centred on any funds going to Harare," he said. The figure was a "creation of Dumisani Muleya in Harare". Muleya is a journalist based in zimbabwe. "There have been discussions around what policies need to be undertaken to help boost (Zimbabwe's) economic performance, control inflation and bring about a stable exchange rate (and), more importantly, what to do to avoid a possible expulsion of Zimbabwe from the International Monetary Fund (IMF)." This included possibly assisting Zimbabwe with its arrears to IMF, which were in the region of $295m. 

Analysts Say Zuma Controversy Could threaten Stability
The ongoing controversy over axed former deputy-president Jacob Zuma, is a potential threat to South Africa's stability, warn two leading analysts. Zuma was fired by President Thabo Mbeki soon after the fraud trial of his former financial advisor, Schabir Shaik, came to an end. Zuma's dismissal has caused Mbeki to face a storm of criticism from his party, the ruling African National Congress (ANC), and its alliance partners, the South African Communist Party (SACP) and Congress of South African Trade Unions (COSATU). COSATU and the SACP have openly pledged their support for Zuma. In a letter to an alliance crisis meeting late August, Mbeki said: "I am informed that some within our broad movement, who believe that Deputy President Zuma is a victim of a counter-revolutionary, capitalist and neo-liberal offensive, are convinced that, as president of the ANC and the republic, I occupy the leading position in the political onslaught against [ANC] Deputy President Zuma. "I understand that these are spreading the story that, presumably for counter-revolutionary reasons, I am opposed to Comrade Zuma becoming president of the ANC and the republic." These rumours had "already caused great harm to the ANC, the alliance, the broad democratic movement, the democratic revolution and the country", said Mbeki, and the alliance leadership had to confront the matter "head-on". The president challenged the alliance to hold a commission of inquiry to establish whether the corruption allegations against Zuma stemmed from a conspiracy to sideline his former deputy politically. Paul Graham, executive director of the Institute for Democracy in South Africa, pointed out that the problem would have to be resolved, "otherwise you've got a governing party in conflict with itself, potentially undermining its own constitutional commitments". Among the allegations Zuma faces is that he tried to solicit a R500,000 (about US $77,500) bribe, through Shaik, from a company that won contracts in South Africa's controversial arms procurement programme. Zuma's supporters are demanding that Mbeki reinstate him and quash the charges. Zuma is championed by the "left" in South African politics, who have grown increasingly critical of Mbeki's "neo-liberal" policies that have struggled to deliver on jobs and poverty alleviation. As both deputy president of the ANC and the country, Zuma was expected to be next in line to succeed Mbeki in 2009. Independent political analyst Aubrey Matshiqi says the demands by Zuma's supporters were becoming increasingly "irrational" and "cannot be met" by Mbeki without sacrificing the country's constitution. Graham agreed, saying that "all that can happen is to go forward [with the trial] and, at the end of it, if Zuma is proven to have been accused unjustly, he can seek remedies". However, he commented that former deputy presidents could not sue for unfair dismissal. "You serve at the pleasure of the president, and in many democracies people are asked to move on for all sorts of reasons - it's one of the occupational hazards." A commission could have the effect of dividing the alliance even further, because COSATU will have been pushed deeper into the political corner they already find themselves in and they might become more desperate. It could have undesirable consequences for the country," he warned. A commission of inquiry could "reinforce the climate that already exists, in which Zuma's supporters are unlikely to accept a guilty verdict in his case". "I shudder to think what will happen on that day," Matshiqi said. "If the masses who support Zuma are mobilised against a guilty verdict, then you cannot exclude a violent reaction to that verdict." However, he believed that "cracks are emerging within COSATU", as those who stridently supported Zuma were "beginning to look irrational" as a result of their changing positions and unconstitutional demands.

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AUTOMOBILES

Vehicle Sales Boom Raises Imperial Profits

Booming car sales helped boost the profit of SA's largest diversified industrial company, Imperial Group, 46% to R2,5bn in the year to June. Increased vehicle affordability and emerging consumers saw the domestic new-car market grow 31% in the year to June. Imperial's new-car sales grew by double that figure at 62%. Imperial's combined new and used car sales came to a record 136882 in the period under review, and the group is now aggressively expanding its retail infrastructure. Imperial had "undoubtedly made all the right moves" in positioning itself to benefit from consumers' spending spree on cars, group CE Bill Lynch said at an analysts' presentation August 24. Imperial's distributorship division imports marques such as CitroĂ"n and Renault, which have gained significant market share as local car makers struggled to keep pace with demand. The division became the largest profit contributor in the group in the year to June, reporting a 64% leap in operating profit to R928m and a 54% jump in revenue to R9,7bn. Imperial was set for further growth with the recent addition of the Tata, Lotus and Proton marques, among others. The group also owns a large network of dealerships representing companies that produce cars in SA, such as Volkswagen. Imperial added 31 dealerships in the period and suggested that there was scope to take over a significant further number of independent dealerships. Lynch said the group had identified opportunities to add about another 25000 used-vehicle sales a year in the next few years. Imperial Group recorded 22% growth in revenue to R42,5bn in the period under review. Its fortunes were also bolstered by the disposals of businesses, which raked in R344m profit. The group sold its lucrative European logistics company JH Bachmann during the period and a stake in construction material merchant Distribution & Warehousing Network, among other assets. Headline earnings grew 25% to 1046c a share, in line with analysts' expectations. But some analysts did not expect Imperial to maintain the current pace of growth. National vehicle sales remained strong but have shown signs of losing steam. Imperial's insurance division also reported sterling gains on the back of the buoyant car market. Operating profit increased 53% to R419m. The group's largest division by revenue, Imperial Logistics, was buoyed by "outstanding" performances at its international businesses, based mainly in Europe. Operating profit grew 16,3% and revenue was 10% up at R12,7bn. Its leasing and fleet management division's operating profit fell 11% despite an increase in revenue. The group's aviation business remained under pressure from the rand, with operating profit declining 7,6%. The car rental and tourism division also reported improved results.

McCarthy Motor Vehicle Sales Record 

Bidvest subsidiary McCarthy Motor Holdings reported record sales of about 72600 vehicles in the year to June, an increase of about 10% on the previous year's figure. However, sales failed to meet the group's target of 75000, which would have elevated McCarthy to the top spot among SA's vehicle retailers. The company, SA's second-largest vehicle retailer after Imperial, was riding the wave of SA's car-sales boom driven by lower interest rates and stable car prices, among other factors. The group recorded a 14% increase in revenue to R13,6bn in the year to June, while profit was up 22% to R500m. It hoped to increase vehicle sales to 83000 in its new financial year. The company's trading margin also hit a record of 3,8% during the period under review. But this achievement was not attributable to the boom in the motor industry, in which margins have declined. McCarthy said its margin on used vehicles was at about 3,4% in the year under review, compared with about 4,5% two years ago. The margin gains came from McCarthy's Yamaha business, which was helped by the stronger rand, and its vehicle-related financial services. Its Yamaha business distributes a range of imported products, such as motor cycles, musical equipment and lawn mowers, in SA. McCarthy chairman Brand Pretorius said that the group had failed to achieve its targeted vehicle sales mainly because of a decline in used-vehicle sales, a trend that was prevalent throughout the market. Pretorius said, however, that the used-car market was normalising. With the possibility of the South African new-vehicle market doubling over the next five years, McCarthy was also expanding its dealer network.

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CREDIT RATINGS

Further Credit Upgrades

Fitch Ratings has become the third of the major international agencies to upgrade SA's sovereign credit ratings this year. But the clear message from all three agencies is that any further upgrades will depend on SA making progress on its socio-economic objectives of cutting poverty and unemployment. "One thing that is clear from all the rating agencies' statements is that we have got to focus on reducing poverty and unemployment, to ensure sustained long-term stability for SA," said national treasury director-general Lesetja Kganyago August 25. Government plans to address these issues would be given more impetus by the work, co-ordinated by the deputy president, to push the economic growth rate to 6%, Kganyago said. Fitch upgraded SA's long-term foreign currency ratings from triple B to triple B-plus, bringing it to within one notch of the coveted A rating. The Fitch move follows the upgrades by Moody's in January and Standard & Poor's earlier in August, with SA's sovereign rating now at three notches above the entry level for investment grade on all three ratings scales. The agencies have all cited SA's increased level of foreign exchange reserves and its higher economic growth rate as reasons for their upgrades. Better credit ratings help countries, and their companies, to borrow at better rates, thus lowering the cost of capital for government and for corporate borrowers.

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FINANCIAL NEWS

Old Mutual Swedish Deal

Old Mutual stands on the verge of the largest deal in SA's financial sector, eclipsing even Barclays' purchase of Absa, provided that provincial thinking does not get in the way. There has been speculation of a foreign acquisition for some time and, on May 13, they seemed to have lined up the target when Old Mutual said it was in "preliminary discussions with Skandia which may or may not lead to Old Mutual making an offer for Skandia". Listed in Stockholm, Skandia is Sweden's largest life insurance company, and Old Mutual would have to fork out a fairly hefty R37bn to do so. To contextualise: SAB paid the equivalent of $5,6bn for Miller in 2002, and Barclays' purchase of Absa earlier this year was a bargain at R33bn. Old Mutual, flush with about R10bn, would still have to raise some cash. Some analysts say the best option would be a general rights issue. But rumours from the leaky vessel that is the marketplace suggest there could be a glitch: the thinking within the lofty spires of the Reserve Bank. The Bank, it is said, is a tad uncomfortable that, following Old Mutual's listing on the London Stock Exchange in 1999, only 56% of shareholders are South African yet 86% of its operating profit comes from SA. That means that despite most of the profit being generated locally, nearly half flows out of SA to UK shareholders. Similarly, a rights offer would see South African shareholders pump yet more money into the group, only to see it go to Scandinavia. This contrasts sharply with the giddy joy with which afternoon radio talk show hosts speak about Barclays pouring money into SA. But that is only half the story. While Barclays has indeed brought money into SA, dividends will flow to Britain. Human rights lobby group Jubilee SA said recently that, using Absa's own projections, it estimated that between R11,8bn and R16,8bn would leave SA over the next 10 years through dividends to Barclays. This means up to 51% of the initial R33bn Barclays is paying for Absa will leave the country in the next decade. The point is that the opposite will be true of Skandia. Sure, a wad of money could flow out initially if there is a rights offer, but then dividends would flow back to the 50% of shareholders in SA and over a much longer period. Skandia posted a loss of 122-million Swedish krone for the second quarter, compared with expectations of a 1-billion krone profit. The key to this was a 1,13-billion krone writedown of its UK financial advisory business. Skandia's share price fell 1,9% the day after. But Skandia's balance sheet is much cleaner after the write-downs. Old Mutual spokesman James Poole said speculation about how any deal would be funded would be premature. Still, it would be silly if the company had not weighed up its funding options, which could easily have formed part of discussions at Old Mutual's frequent visits to the Reserve Bank. The authorities should remember that the mere fact that imperialist-minded companies such as Old Mutual can think about buying something the size of Skandia should be seen as a testament to the strength of local institutions. It puts SA on the global business map. The provincial thinking mould needs to be broken, and because of foreign interest in companies such as Absa, and strides made by groups such as Old Mutual and SABMiller, this issue will have to be thrashed out sooner rather than later.

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FOREIGN AID

Sub-Saharan Africa Still In Dire Need of Aid

Business as usual for global trade and aid will see conditions for people in sub-Saharan Africa worsen while for others they will improve, a report has warned. Under a scenario drawn up by the Washington-based International Food Policy Research Institute (IFPRI), poverty and malnutrition in the southern half of Africa will worsen even as it improves in other poor areas of the world unless drastic interventions in agricultural policy and investment are implemented. Despite the current enthusiasm for improving conditions in Africa, prospects for change are remote. The United Nations (UN) Millennium Development Goals -- which specify targets for improving access to food, health and education in poor states -- appear increasingly unattainable five years after they were set. To meet these, a 56% investment increase in rural roads, 117% in education, 55% in clean water and 44% in agricultural research and an increase of 8% in annual gross domestic product growth among sub-Saharan nations are also necessary, the report says. "The policy and investment choices of African policymakers and the international development community can make an enormous difference for Africa's future agricultural production and food security," the report says. However, if conditions carry on as they currently are, instead of halving the number of people suffering from hunger by 2015, the number of children suffering from malnutrition in sub-Saharan Africa will not fall from the current 30% as the population rises. The UN will meet in September to review the progress of the eight goals, which include increased access to education, the eradication of extreme poverty and hunger and improved health care.

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FOREIGN ECONOMIC RELATIONS

Sacu And U.S. to Resume Trade Talks

The Southern African Customs Union (Sacu) and the US are set to restart the free trade area discussions that ended earlier this year, following the intervention of President Thabo Mbeki. Neither side has formally announced the renewed discussions, but both US and South African officials have confirmed that the two sides will meet again late September. A new target, December 2006, has been set for completion of the talks, with meetings to be held every six weeks. Florie Liser, assistant US trade representative for Africa, said she was confident an agreement could be reached within the time frame agreed. New energy has been infused into the languishing talks after discussions between Mbeki and President George Bush on the fringes of July's Group of Eight summit in the UK. SA's chief trade negotiator, Xavier Carim, said negotiators intended meeting in the last week of September at a venue that had yet to be decided. He said it would be in one of the five Sacu countries -- SA, Lesotho, Swaziland, Namibia and Botswana. The two groups of negotiators have reached new agreements on how to proceed while avoiding the pitfalls that caused previous attempts to fail. These include decreasing the number of topics discussed at each meeting in order to prevent the stretched Sacu trade negotiators from being overwhelmed. Regional trade representatives face a punishing schedule that includes negotiations with Latin American trade bloc Mercosur, the European Free Trade Association, India and China, as well as the Doha round of international trade discussions. However, Peter Draper of the South African Institute of International Affairs was not confident the sides would reach agreement. Differences between Sacu and the US over a range of issues appeared to be fundamental, Draper said. Regional and country-to-country free trade agreements have constituted a major initiative of the Bush administration, even though they have been overshadowed by the war against terror in Iraq. The administration has concluded agreements with 11 countries in the past two years, with seven others in negotiations, excluding the five Sacu countries. The US government has just ratified an agreement with Central American nations, called Cafta, the largest agreement of its type since the Nafta accord between Canada, the US and Mexico was ratified in 1994. SA has until now considered the negotiations a low priority as almost all South African exports enter the US duty-free in terms of the Africa Growth and Opportunity Act (Agoa), which was due to expire in 2008. Bush recently signed an amendment to the act, extending the law until 2015. The agreement has resulted in an 88% increase in Agoa trade between the 37 African countries that fall under the act, although the majority of this increase consists of oil exports, mainly from Nigeria. Nevertheless, non-oil products increased a healthy 22% over the period, with products from Sacu countries constituting the major part of this increase.

Nigeria Woos South African Investors

A three-day conference took place from August 24 in Johannesburg has highlighted the possibilities for increased trade between South Africa and Nigeria. The 'Nigeria and South Africa Business Investment Forum 2005' kicked off in South Africa's commercial centre, mostly with the aim of attracting South African entrepreneurs to the West African country. Over 300 delegates were in attendance. Nigeria is currently South Africa's biggest trading partner in West Africa and its third largest on the continent after Mozambique and Zimbabwe, Nigerian ambassador to South Africa Tunji Olagunju told those at the gathering. Still, "Nigeria's trade is mostly with Europe and North America," he noted. "This must change." Figures provided by Nigerian officials indicate that the value South Africa's exports to the country increased from 45 million dollars in 1998 to 456 million dollars last year. Imports have also increased -- from 76 million dollars in 1998 to 800 million dollars in 2004, with oil accounting for the lion's share of this rise. "South Africans have come to me in greater numbers. Next to them, I would say, are the Chinese," Mustafa Bello, chief executive of the Nigeria Investment Promotion Commission, told the conference. Nigeria is also planning to hold investment forums in China, India, the United States, Russia, Ukraine and the United Arab Emirates. "We have a lot to offer," said Bello. "We have proven crude oil reserve of 24.1 billion barrels, 120 trillion cubic feet of gas and 72 million hectares of arable land. We also have minerals like gold, coal, iron ore and manganese." Those South African firms which have established a presence in Nigeria include leading supermarket chain Shoprite and telecommunications giant MTN, which now claims to have 6.3 million mobile phone subscribers in the West African state. In an effort to attract investors, Nigeria may offer a five-year tax holiday to firms that are prepared to set up shop in the country, and a seven-year tax holiday to companies that locate themselves in under-developed regions. Such initiatives have yet to change the perception that Nigeria is a risky destination for foreign capital, however. Last year, the Berlin-based corruption watchdog Transparency International rated Nigeria as the third worst of states surveyed for its annual Corruption Perceptions Index. This study ranks countries according to the levels of graft that are believed to exist there. Of the 146 nations evaluated, only Bangladesh and Haiti fared worse than Nigeria. Nigerian diplomats at the investment forum said they were aware of negative perceptions. "We are working to correct this image," said Michael Kuforiji, consul general at Nigeria's embassy in South Africa. "I have been travelling around South Africa and advising Nigerians living there to obey the laws of South Africa."

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INFORMATION TECHNOLOGY

US Tech Firm Unisys in Black Economic Empowerment Deal

Computer company Unisys has become the first American information technology (IT) group to strike an equity deal in SA by placing 30% of its shares with black investors. While other US companies plan to apply for exemption from empowerment rules requiring black equity, Unisys has turned its African branch into a locally registered entity and sold a stake to Cyberknowledge Systems (CKS). "We are the first major American IT company to have gone this route, so it gives us a window of opportunity and a significant growth opportunity," Unisys Africa MD Barry Holt said August 23. Globally, Unisys turns over about $6bn a year, with the local subsidiary accounting for 1%, or $60m. Holt said he could not comment on why other US companies objected to selling equity. "Companies like Dell and Microsoft have their own governance so they have to decide if it's right for them, but we firmly believe this is the right way to have a healthy, sustainable future in SA," he said. "We found a way to accomplish it from a legal and structural point of view because there was a strong willingness to do it." The final draft empowerment charter for the information and communications technology sector calls for a company to be 30% black-owned. A clause designed to accommodate multinationals will let them apply for exemption if selling equity would "cause inherent commercial harm" due to legal, technological or policy barriers. CKS has paid an undisclosed amount for its stake, partly funded by its directors, partly by an Investec loan, and partly by selling 25% of its holding company to Investec. The financial structure left CKS with only a small debt to repay, said its chairman Mohamed Madhi. "We anticipate within the next 15 months we will be completely free of debt." CKS is a black-owned IT consultancy focusing on the public sector, mining and communications industries. Its operations will be folded into Unisys as the heart of a new consulting division. Its directors Madhi, Patrick Ngwenya and Xolani Mkhwanazi will join the Unisys Africa board. Other shareholders in CKS include the Mineworkers Development Agency and the Black Management Forum Investment Company. Unisys supplies computers to large corporations including Telkom, and 80% of all cheque processing in SA is handled by its hardware. It also conducts systems integration and IT infrastructure outsourcing. But it needed to beef up its consultancy skills and the deal with CKS would achieve that, said Holt.

Telkom, CSC Spread Network to Old Mutual

Financial services group Old Mutual and its subsidiary Nedbank have signed a $275m technology deal with Telkom and Computer Sciences Corporation (CSC). The deal, worth about R1,7bn in local terms will see Telkom and CSC provide and maintain Nedbank's and Old Mutual's networking infrastructure for the next five years. CSC estimates its share of the revenue will be $125m, with the bulk going to Telkom. The agreement builds on an existing $300m seven-year information technology (IT) outsourcing deal that CSC signed in 1999 to manage Old Mutual's IT infrastructure in SA. The new deal extends that to supplying networking services for Nedbank. The contract includes creating a single, shared network to carry both data and voice traffic, and providing network security and help desk support. The project kicked in on August 1, with CSC and Telkom supporting staff at the major centres in Cape Town, Durban and Johannesburg, and other branches across the country. Telkom CEO Sizwe Nxasana said the deal made Telkom a serious player in the IT and outsourcing market. That is a field the company has been trying to get into to protect its revenue as the cost of basic telecommunications services falls under increasing competition. Old Mutual and Nedbank expect to benefit from immediate and significant cost reductions, said Nedbank's director of Information technology operations Willie Scholtz. That would partly come through reducing the risk of technology failures and by using their joint buying power. The companies would have access to leading-edge technology without any capital expenditure.

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MANUFACTURING

Manufacturing Sector Health Boosts Economic Growth

A spectacular turnaround in the manufacturing sector helped the economy grow a sprightly 4,8% in the second quarter, putting it back on track to reach government's target of 4,3% growth for the year. Coming on the heels of more subdued growth of 3,5% in the first quarter, the latest gross domestic product (GDP) figures are good for SA's investment and employment prospects, as government grapples with ways to push growth even higher. Crucially, the lion's share -- 1,2 percentage points -- of the quarter's expansion came from the manufacturing sector, which accounts for 16,4% of GDP and has significant potential for job creation. But analysts said August 23 that the numbers were bad news for those hoping for further interest-rate relief this year, with the potential inflationary effects of brisker economic growth, and the absence of further need for monetary stimulation, all but ruling out another rate cut. Releasing the data, Statistics SA (Stats SA) said GDP grew by a seasonally adjusted and annualised 4,8% in the second quarter, exceeding economists' forecasts of growth in the region of 4,4%. Unadjusted real GDP at market prices for the first six months of the year increased 4,4% faster than the same period last year, giving an early indication of the economy's likely performance for the year, Stats SA said. Finance Minister Trevor Manuel said earlier this year that government was aiming for 4,3% -- which economists said could be jeopardised by the South African economy's sluggish performance in the first quarter. Economists were pleasantly surprised by the figures, which showed growth in all 10 sectors canvassed by Stats SA and improvements over the previous quarter in seven of them. Manufacturing was the star performer, showing 7,3% growth from the previous quarter, when it contracted by 1,9%. This was the sector's fastest rate of growth since 2000, and coincides with a 13% drop in the value of the rand against the dollar so far this year. Most of the rand's decline came after the Reserve Bank surprised the market with an interest-rate cut in April, citing a worrying slackening of activity in manufacturing. The volatile agriculture, forestry and fishing sector grew an annualised 10,1%, compared with 4,1% in the first quarter, while the construction sector expanded 6,2%, from 5,1%. The finance, real estate and business services sector, which accounts for 18,6% of GDP, grew an annualised 4%, compared with 5,9% in the first quarter. Brait economist Colen Garrow said the data showed that the economy was "shaking off its mediocre performance, which characterised boom-bust periods prior to 1994". "A 27th consecutive quarterly period of GDP growth since 1998, and an economy which remains in an upward phase of its business cycle, are records which are unlikely to go unnoticed by investors," he said. However, "with the higher trajectory in GDP growth firmly in place, the Reserve Bank is unlikely to entertain any notion of extending the easier interest-rate environment", Garrow said. Standard Bank economist Johan Botha said the latest data suggested "a new resilience" in the economy after a slowdown in the previous two quarters that was "somewhat more pronounced than anticipated".

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MINERALS & METALS

Gold Strike Halted, But Jobs Could Be Big Loser

The National Union of Mineworkers (NUM) asked its staff to resume work August 11, bringing the four day strike to an end. More than 100,000 miners, about 70% of those working in the industry - had downed tools in protest at low pay and poor living conditions. South Africa's largest mining union earlier said that it had advised its members to accept a new pay offer. Employers upped their offer to 6-7%. The strike, which was sparked by the Chamber of Mines' insistence on a 5% wage increase instead of the 12% demanded by the workers, quickly grew to be one the biggest in 18 years, sucking in members of the key unions, the National Union of Mineworkers (NUM) and Solidarity. NUM general secretary Gwede Mantashe said: "We are also pleased that we were able to settle the strike in such a short space of time." Solidarity spokesman Dirk Hermann said last night that his union would still call for the establishment of a mining industry bargaining council to prevent companies from making offers to individual unions. During the course of the strike, AngloGold Ashanti and Harmony gave the unions separate offers which were higher than what the chamber had proposed. Gold analysts said that unless the price of gold increases, the various mining companies would feel the pinch of the pay increases. Many of them were already on cost-cutting measures before the onset of the strike. Analyst Nick Goodwin said the effect of the offer on individual companies would largely depend on what happens to the gold price. He said there would have to be an increase of about 25% for the industry to absorb the increases in labour costs. "They may have to cut costs further. But there is always a limit to the extent to which a company can cut costs. Sometimes cutting costs too much can have an effect on operations," Goodwin said. The increases were likely to reduce mining companies' revenue by 3% on average. "That may also force companies to retrench more employees than they had planned to," he said. Another gold analyst, Leon Esterhuizen, said the increase would further squeeze gold-mining companies' profits.

Implats to Hike Production 5 Percent a Year

Prospects for platinum group metals and nickel remained sound, and Impala Platinum (Implats) planned to continue increasing production 5% a year to 2010, CEO Keith Rumble said August 26. The five-year supply deficit in the platinum market ended last year, and the relatively balanced supply-demand situation is expected to continue, with the metal trading between $800/oz and $900/oz for the next few years. Platinum demand is being driven mainly by the diesel vehicle sector. This year heavy-duty and off-road vehicles will move onto auto-catalytic converters and the US has introduced a tax incentive to encourage the use of diesel vehicles. The palladium market remained in surplus and there were still substantial stocks above ground in Zurich and Russia, which were likely to depress the price to a $150- $200/oz trading range to 2007, Rumble said. The rhodium market had been highly volatile and Implats was forecasting a wide trading range of $1250-$2000/oz. A widening gap between nickel production, including new capacity, and consumption is expected to persist until 2014, an outlook which justifies Implats' investment in the recently announced Ambatovy project in Madagascar. The group is still on track to achieve its target of producing 2,3-million ounces of platinum by 2010, which assumes a contribution of about 230000 ounces from its Zimbabwean operations. Implats plans to spend about R3,3bn on capital items in the 2006 financial year, of which only a small proportion will be on the Ambatovy joint venture. If approved, spending on that project will rise to about R2,8bn in 2008 and R2,9bn in 2009. The group held R3,9bn of cash at the end of June, which will be used to fund capital expansions. Analysts asked the directors if they had any other plans for the cash, in view of the fact that neither Ambatovy nor a substantial expansion in Zimbabwe had been approved, and the group could gear its balance sheet. Implats finance director David Brown said management would reassess the position and if there was excess cash, it would be returned to shareholders. If the Ambatovy and Zimbabwe projects proceeded, Implats would gear to about 20%-25% by 2007 or 2008. Group sales in the year to June rose 6,2% to R12,5bn, compared with the same period last year, reflecting higher volumes and dollar prices, offset by a stronger rand. The cost of sales increased 10,2% as production was expanded, there was an 8% wage hike last year, and local inflation and the managed exchange rate affected Zimbabwean costs. There was also an increase in the amortisation charge. Headline earnings grew 9,9% to R43,25 a share and the dividend for the year was lifted by a similar percentage to R23. Rumble said the Impala lease area reported a "sterling performance", with increasing efficiencies.

Strong Results at BHP Billiton

Global resources giant BHP Billiton reported a strong set of results across all its businesses for the year to June, setting production records in 11 commodities in the past year, CEO Chip Goodyear said August 24. Goodyear said the strong commodity prices environment had resulted in BHP Billiton achieving financial records, and it followed on a strong performance last year. Higher prices were achieved for iron ore, copper, metallurgical coal, petroleum products, energy coal, aluminium, manganese alloy, nickel and diamonds. The group grew earnings 89% to $1,064 a share in the year to June, compared with the corresponding period last year, and it raised the total dividend for the year 8% to $0,28 a share. Goodyear said he could not comment on the analyst's expectation of future cash generation. BHP Billiton's turnover grew 28% to $31,8bn, which includes a one-month contribution from WMC, the world's fifth-largest nickel producer. Chief financial officer Chris Lynch said the acquisition had been expected to increase Billiton's gearing to 41%, but gearing at year-end was at 35,7% due to cash flows strength. Goodyear said the integration of WMC, bought for $7bn in June, was on schedule. A number of offices had been closed and about 400 jobs had been eliminated. Other cost savings had been identified, but the group was keeping to its original projections of A$115m a year from the merger. A key issue of concern for the market had been the effect of rising operating costs on the group. Lynch said costs rose 5,7%, or $775m, mainly due to higher wage settlements and bonuses; use of contractors; raw material costs of fuel and energy; and maintenance, legal and compliance costs. Most costs were deliberately incurred to enhance earnings capacity, but management was conscious of the need to ensure they were not a permanent structural change. About $100m was saved through cost efficiencies. SA contributes to BHP Billiton's earnings within its aluminium, carbon steel materials and energy coal divisions. In carbon steel materials, earnings before interest and tax increased 148,1% to $2,8bn, and in aluminium they were 25,9% higher at $977m. Southern Africa accounted for 14% of BHP Billiton's net operating assets in the year to June, substantially behind Australia (49%) and South America (23%). Goodyear said the outlook was positive: inventories were low and supply was lagging because of regulatory and human capital issues. The diversification of BHP Billiton's product portfolio, which was its underlying strength, would "shine through" as global supply and demand returned to balance.

Exports Help Mittal SA to Record

MIittal Steel SA reported record headline earnings of R3,2bn for the six months to June August 10, but warned that steel prices would fall and input costs would rise in the third quarter. The solid first-half results were driven by strong yet softening international steel prices during the period and a 6% increase in exports, claimed CEO Davinder Chugh. Sales in the more lucrative domestic market were 7% down on the corresponding half last year and 12% compared with the second half of last year. Chugh said this was due to reasons linked to the global slowdown, such as high inventory levels and order delays due to expected price cuts. He did not believe the domestic decline was due to a major structural change in demand. Revenue at Mittal Steel SA, Africa's largest steel maker, rose 16% to R12,3bn in the first half from a year earlier, and operating profit jumped 47% to R4,3bn. This led to headline earnings a share more than doubling to 723c, beating analysts' most optimistic expectations. Parent company Mittal Steel, the world's largest steel maker, meanwhile, reported disappointing second-quarter results yesterday, with net income falling 15% from the corresponding quarter last year. It was affected by lower steel prices, production cuts and rising input costs. The group's South African operations were affected to a lesser extent than most world producers by input price escalations, thanks to its iron-ore supply arrangement with Kumba and the its self-sufficiency in some other inputs. Mittal Steel SA's rand cash cost a ton of hot-rolled coil, which is the industry benchmark, rose 11%, while the domestic hot-rolled coil price was up 13% from the year-ago period, despite price cuts in the period under review. Both Mittal and its global parent expected steel prices to fall further in the third quarter, and then start picking up in that quarter or shortly afterwards as major producers trimmed output. Chugh said that there were already signs of improving steel prices evident from the latest orders the local steel maker has secured. He said Mittal Steel SA's talks with government about a more favourable pricing model for domestic buyers were in the final stages. Mittal Steel SA's 2-million-ton expansion plan advanced in the period under review, with 250000 tons being gained through increased productivity from existing assets. A number of projects aimed at expansion, cost savings and environmental issues, among other things, will cost the company R9bn over the next two or three years. Mittal Steel SA expected earnings in the third quarter to be "materially lower" than in the second quarter.

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