The firm has lost 26% of its value this year alone, making it the worst performer on the Dow this year. Last year too it was the worst performer in the index, losing 45% of its value at a time when other firms were rising stratospherically – and the Dow overall gained 25%.
The Dow has an altogether different methodology from the JSE top 40 index, which measures the value of the biggest companies on the JSE and regularly ousts those in the relegation zone and replaces them with faster rising shares. It bizarrely excludes some of the worlds biggest companies today. Alphabet (which owns Google), and Amazon.com along with Facebook, do not qualify as industrial firms in the way in which the Dow is structured and are thus excluded. So as an index, the Dow as a measure of value or prosperity of the US economy is actually a deficient, and it is far more useful to consider the more broad-based S&P 500 to get a sense of the financial health of the American economy.
Still. It’s an historical day and a good reminder of how much the world is changing.
You only have to look at the composition of the Top 40 on the JSE to realise how quickly South Africa has evolved from a mining-intensive economy into a far more diversified one to realise why the new mining charter is likely to hasten the demise of the industry rather than prolong its success.
If you look at the components of the JSE the day Nelson Mandela was released from prison on February 11, 1990, compared to today, the differences are startling.
Just three companies that were on the Top40 the day Mandela was released are still in the index: Anglo American, itself nearly a casualty of commodity cycles just three years ago, Richemont, and Remgro. Of the companies on the top 40 in 1990, just nine exist in recognisable form today, including Rainbow Chickens, now RCL, Afrox, Pick n Pay and AECI. Harmony still exists and is actually a primary reason why so many names have disappeared from the market.
Back in 1990, South Africa was deep in junk status, heavily indebted, and sanctions-afflicted, hence the concentration of the economy in the hands of just a few corporations. SAB was yet to embark on its global expansion and Old Mutual, due to return its primary listing to the JSE next week after a costly two-decade gallivant around the globe, was still a mutual society and like Sanlam was not listed on the JSE.
The groundwork was still being laid for MTN and Vodacom whose business plans assumed a total market for cell phones in South Africa of no more than 80,000 and you still needed a fixed line to make a phone call. There was no internet, and ATMs were a new-fangled concept that meant you didn’t need to queue at the bank anymore to draw cash.
More than three quarters of the top 40 was made up of mining companies. 23 of them were gold miners. Names like Deelkraal, Elandsrand, and Vaal Reefs were scrawled across the chalk boards at the Diagonal Street open-outcry stock exchange trading floor.
As gold prices fell and SA entered the global economy, first gradually, then quickly after the 1994 elections, the composition of the market changed rapidly.
Today the JSE is a smorgasbord of mining, retail, telecommunications, and financial services. Companies come and go. Steinhoff a year ago was one of the ten biggest firms on the market – and now has plummeted into the small cap sector following the massive fraud which has seen 98% of its value wiped off the value of the company. Bidvest has split into its domestic-services company and global food services business Bidcorp. Mr Price, Spar, and Aspen are included. About 70% of the profits of the top 40 companies on the JSE are generated outside the country, courtesy of Naspers’ investment in Tencent, Aspen’s increasingly global footprint, and the fact that financial services firms increasingly are looking beyond South Africa’s African borders for growth.
The greatest weakness of the new Mining Charter, while a vast improvement on its most recent predecessor, is that it fails to recognise that the world has changed so dramatically.
In 1980, when General Electric was at the height of its considerable powers in the US, mining and manufacturing in South Africa vied for top spot as being the biggest contributors to GDP growth in the economy. In 1987, when current president Cyril Ramaphosa brought the country to a standstill in the miners' strike, the industry employed more than 760,000 people. Today, mining makes up 7% of GDP and mines employ fewer than 450,000 people.
Mining Minister Gwede Mantashe's insistence that mining is a sunrise industry is over-ambitious. It has been in terminal decline for thirty years. The mining charter and its requirement for a 10% free carry for workers and communities where mining happens is noble, but foolhardy, in a country that urgently requires jobs for 27% of its working age population who cannot find meaningful long-term work. If South Africa makes it prohibitively expensive to invest, and can not provide sufficient stability for long term growth, then capital is going to head to places where it can get a better return with lower risk.
As GE learned this week, the world has moved on. South Africa – and Mantashe – need to learn the same lesson and rather than hark back to a past that no longer exists, look forward to a future that looks nothing like anything we could ever have imagined.
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