AYABONGA CAWE: Infrastructure reform at a time of trade flux

“Leveraging the strengths of China’s enormous market we will enhance our capacity for opening up”, said the readout from the once every five year economic reform meeting of the Communist Party of China (CPC).

Along with reforms in social security, income distribution and transfers to subnational spheres of government, the third plenum highlighted the continuing “deepening [of] supply-side structural reforms” rather  than the consumer boom-enabling stimulus many had expected. It cut a familiar tone in a world far more unfamiliar in its commercial antagonisms.  

A few days after the end of the third plenum, SA iron ore miner Kumba released a half-year update. Kumba sells more than three-quarters of its iron to Asia, and more than half of this goes to mills in China. Some goes to Europe too, a share that has risen in recent years.

The Kumba update signalled that Chinese mill capacity utilisation had risen from just more than 70% in January to nearly 78% by June. Higher ore demand from Chinese mills in the coming years, and hopefully better port and rail performance, may not only clear what Kumba CEO Mpumi Zikalala suggested was a Carlton Centre inspired stockpile. It may also become a bit more costly to do so. The company said freight rates in the first half of this year stood at $20/tonne, nearly double the rate charged in 2019.

Notwithstanding this, in volume terms 18.1-million tonnes of ore were shipped in the first half of this year, bringing in just under R33bn, while a little less than 20-million tonnes were shipped out in the first half of 2019, yielding about R30bn. So, while Kumba shipped nearly 2-million tonnes less than it did five years ago, it generated R3bn more in this half year than in the same period in 2019.

Paradoxically, the average dollar price for Kumba’s iron ore contracts was $11/tonne lower this year than five years ago. So how did it still make more money? The answer rests in the depreciation of the rand since 2019.  

The realised rand per tonne price was nearly R300/tonne higher in the first half of this year than in 2019, when dollar prices were higher. Viewed in this way rand weakness served as a “hedge” for Kumba (as an admitted price-taker) in the face of declining ore prices.

Furthermore, if Kumba had sold close to half of its more than 8-million tonne stockpile (or had an inventory tally at about the same level as the 2019 half year result) it would have earned over R8bn more revenue at the rand per tonne price quoted in the Kumba half-year result.  

A few things are of interest from this. First, relative currency weakness in a context of steady commodity demand can yield margin and value growth even in instances where there is no major rise in the volume or the dollar price of the product exported. Second, this value and the degree to which it is realised is dependent on whether the risks of freight and logistics constraints and shipping cost growth are adequately foreseen and managed.  

Lastly, protective trade measures employed in the US, Mexico, Chile, Brazil and the EU against Chinese steel, the environmental politics associated with green protectionism and imperialism, and the rising impulse for higher defence and military spending introduce further complications to the global steel market into which Kumba sells.

This is similarly manifest in company level shifts, as seen in the break-up of the two decade-old Sino-Japanese auto steel partnership that involved BaoSteel and Nippon Steel. This is ostensibly part of Nippon’s $14.1bn play for ownership of US steel giant US Steel Corporation, and disaffection associated with tectonic shifts in industrial power between Japan and China.  

In a world of this sort of turbulence and seemingly far-fetched opportunity, “friendshoring” reinforces distinctions between friends and foes, and green barriers reorganise markets. It is in this context that the SA reforms of our infrastructure-focused state-owned companies must respond.

• Cawe is chief commissioner at the International Trade Administration Commission. He writes in his personal capacity.