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Writer's pictureRALPH COPE
Oct 25, 20204 min read

Outlook for the South African Construction, Agriculture and Mining Sectors

Vikfin operates predominantly in the construction, agriculture and mining sectors. We therefore pay close attention to factors that directly and indirectly impact these pockets of the economy. In this blog we break down the analysis into the outlook for these three sectors in an effort to find some visibility about the future.


Construction

The construction industry in South Africa is expected to record a CAGR of 13.2% to reach ZAR 286 billion by 2024, according to ResearchAndMarkets. The residential construction industry in value terms increased at a CAGR of 2.3% during 2015-2019. Over the next eight quarters, construction market growth is expected to remain impacted due to the economic downturn caused by the COVID-19 pandemic, across the residential, commercial, industrial and institutional sectors in South Africa. Despite near term challenges, the medium to long-term outlook remains positive.


Over the short term, investment in the construction industry will be driven by government spending in the infrastructure sector. The residential construction industry in value terms increased at a CAGR of 2.3% during 2015-2019. The commercial building construction market in value terms is expected to record a CAGR of 12.3% over the forecast period. Infrastructure construction was estimated to be US$8.67bn in 2019, posting a CAGR of -0.9% during the review period.


Against the backdrop of a contracting overall economy with South Africa’s gross domestic product (GDP) for 2020 forecast to decline by over 8% year-on-year, there is a silver lining in the agricultural sector outcomes for the next season.


Following two consecutive quarters of stellar performance by the agriculture sector with 28.6% and 15% quarter-on-quarter seasonally adjusted annualised growth, we expect a similar feat in the remaining quarters of 2020 due to a combination of a good crop harvest, strong agriculture exports and the unseasonably high commodity prices.


Agriculture


Agriculture growth momentum will continue into 2021, contributing positively to overall SA GDP outcomes. Favourable production conditions on the back of a La Nina weather pattern will spur farmers to plant more area under summer crops and improve grazing for livestock.Supplies of grain, oilseeds and horticulture crops will be adequate for the year ahead.


Surplus production of agriculture commodities will tame food inflation and contribute towards a benign overall consumer inflation in 2021. The implications are for interest rates to remain at record lows for a bit longer, benefiting consumers. The strong export drive is expected to continue due to the increased availability of product and high international demand. Consumer consumption trends are expected to continue to change with more emphasis on safety, reliability of quality and supply, and ethics in food production systems. Pressure on disposable incomes will lift grain consumption which forms part of basic products and staple food.


Mining



South African mining companies are dipping into their stockpiles to maintain production during the pandemic as social distancing requirements limit the number of on-site employees, according to mining industry expert Roger Dixon. "The South African mines are painting a bright picture, but they are using their inventories to keep up production at the moment," Dixon told S&P Global Market Intelligence. Dixon said it was not clear how mines would reach full capacity under the circumstances, particularly the deep-level operations common to the country. "A lot of companies such as gold and platinum are riding on a high. Palladium and rhodium prices are good. I think when they have to produce at their normal levels, that is when we will see their true colors," Dixon said.


Mines would be more resilient to a second or third wave of COVID-19 due to the safety and behavioral mechanisms already in place, van Zyl added. Some commodities, such as platinum group metals and gold, are less likely to be negatively impacted by the COVID-19 outbreak, van Zyl said. "On the PGM front, there is so much of the production that comes out of South Africa that there is a measure of price support no matter how inefficient the mines are. And gold has its own story."


Dixon believes that the pandemic will take a toll on chrome, manganese and coal, noting that they were already under pressure before the coronavirus outbreak. The movement through ports of manganese, which has a long supply chain, has been slow and will remain so until staff numbers in shipping return to normal, Dixon said.


Mining and manufacturing were the largest contributors to a poor first-quarter performance by the South African economy, according to a June 30 report by Statistics South Africa. In the biggest slump in six years, mining activity decreased 21.5% during the quarter as manganese, iron ore and chromium dragged on growth and offset gains from the coal, diamond and PGM sectors, the report said.


Dixon noted that the coal industry was under severe pressure even before the pandemic, related to decarbonization and requirements for sustainability goals.


"I see quite a bit of the coal that was going to Richards Bay terminal has now been rerouted to state-owned power supplier Eskom Holdings SOC Ltd., and that might be our saving grace on a couple of fronts," Dixon said. "The power outages and power shortages are crippling the mines. If you have a deep-level gold or platinum mine and the power goes down, you are in big trouble. Your concentrators, your mills, everything stops, so maybe there are some positives in the pressure being brought to bear on the coal industry."


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