Policy hits economy harder than commodity cycle

Johannesburg – The performance of commodity-driven economies is more influenced by policy than the commodity pricing cycle.

This was heard during a panel discussion on the repricing of African commodities, at Deloitte’s Africa 2017 Outlook conference, held in Woodmead on Wednesday.  Mining industry representatives on the panel discussed the role of policy in shaping the economy’s performance.

“You can’t get policy change without regime change,” said Peter Major, head of mining at Cadiz Corporate Solutions.

Using the example of Chile, Zambia and the DRC which produced the same amount of copper in the 1970s, this was 600 000 tonnes of copper each. However following regime or policy changes, Chile went from having 600 000 tons of copper to 6m tonnes in production.

“The wrong regime changes happened in the DRC and Zambia and they went from having 600 000 tonnes to less than 100 000 tonnes,” he said.

“We [South Africa] have not had a policy change since 1994. Policy continues to push production down,” he said.

The implications of policy must be considered. Given existing legislation, Major asked whether these policies are designed to produce more commodities, at lower cost and drive job creation. “None are designed to do that,” he said.

When investors consider deploying their capital, policy by far is more important than anything else, more important than commodity prices, he explained.

Second concern for investors is infrastructure and commodity prices is a “distant third” issue.

Macro-economic developments are “smoke and mirrors” for emerging markets. Brexit and the election of US President Donald Trump’s impact on emerging markets will be smaller than what policymakers make it out to be, he said.

Growth is determined by what countries do internally as opposed to what happens in the macro-economic environment. “If we have the right policy, we will have growth,” explained Major.

When times are tough it is easier for companies to shift the blame to government policy, said Bernard Swanepoel, director at To the Point and formerly CEO of Harmony Gold.

He said that it took mining companies two to three years to make adjustments following the slowdown of the commodity super cycle. “The delay action by mining companies shielded or prevented government from realising how big the problem is,” he said. “We are shielding government from the policy changes to deal with the commodity cycle.”

Chris de Vries, managing director of Venmyn, Deloitte shared these views. He said that with the knowledge that commodity prices work in cycles, companies should have seen it coming and should have made preparations to lower the impact.

De Vries added that when things seem to be going well for commodities, governments often want a “piece of the pie” and this may influence policies formed. In other countries like Zambia where the issues are linked to revenues,government had good policies but introduced tax reforms to benefit from the revenues generated.  

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