VZCZCXRO2836
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSA #1932/01 2460609
ZNR UUUUU ZZH
R 020609Z SEP 08
FM AMEMBASSY PRETORIA
TO RUEHC/SECSTATE WASHDC 5546
RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPCIM/CIMS NTDB WASHDC
RUCPDC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUEHJO/AMCONSUL JOHANNESBURG 8321
RUEHTN/AMCONSUL CAPE TOWN 5960
RUEHDU/AMCONSUL DURBAN 0114

UNCLAS SECTION 01 OF 05 PRETORIA 001932 
 
DEPT FOR AF/S/; AF/EPS; EB/IFD/OMA 
USDOC FOR 4510/ITA/MAC/AME/OA/DIEMOND 
TREASURY FOR TRINA RAND 
USTR FOR COLEMAN 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD EMIN EPET ENRG BEXP KTDB SENV
PGOV, SF 
SUBJECT: SOUTH AFRICA ECONOMIC NEWS WEEKLY NEWSLETTER AUGUST 29, 
2008 ISSUE 
 
PRETORIA 00001932  001.2 OF 005 
 
 
¶1. (U) Summary.  This is Volume 8, issue 35 of U.S. Embassy 
Pretoria's South Africa Economic News Weekly Newsletter. 
 
Topics of this week's newsletter are: 
- Experts Believe Inflation will Peak at 13% 
- Land Expropriation Bill Shelved 
- 'South Africans Act like Americans' 
- Intense Lobbying Expected to Pay-Off for Motor Industry 
- Infrastructure Spending to Boost Growth 
- Contracts Awarded for Road Upgrades 
- ACSA Utilizes Recycled Material for Upgrades 
- Eskom Plans to Expand Nuclear Industry and Reprocess 
  Nuclear Fuel 
- Gold Firms Battle Costs and Falling Output 
- Engen Comes Clean 
- MTN Boosts Profits and Pursues Expansion 
- SEACOM Cable Project Moving on Schedule 
End Summary. 
 
------------------------------------------ 
Experts Believe Inflation will Peak at 13% 
------------------------------------------ 
 
¶2. (U) Statistics South Africa (StatsSA) reported that CPIX 
inflation (which excludes mortgage costs) increased from 11.6% in 
June to 13% in July.  The rise was driven by higher electricity, 
food, fuel, and housing costs.  Consensus forecasts had predicted 
that CPIX, which has now breached the South African Reserve Bank's 
(SARB's) 3%-6% target range for 16 months running, would increase by 
12.9%.  The slightly higher increase did not shake the view that 
consumer inflation was close to its peak, and would begin to subside 
in 2009, paving the way for cuts in lending rates.  The SARB kept 
interest rates steady this month, saying CPIX would peak at about 
13% in the third quarter, and then start falling "significantly" 
early next year.  Yields on government bonds, which move in the 
opposite direction to prices, fell as much as 18-basis-points on the 
news while money markets rallied by a few basis-points.   Investec 
Economist Annabel Bishop said she expected CPIX to creep above 13% 
in August, and then ease towards 11% by year-end as fuel prices 
continued to drop.  (Business Day, August 28, 2008) 
 
------------------------------- 
Land Expropriation Bill Shelved 
------------------------------- 
 
¶3. (U) Parliament's Committee on Public Works announced that it has 
withdrawn the highly contested Expropriation Bill until further 
notice.  The bill would have allowed the state to take over property 
under much easier terms than current legislation allows. 
Parliament's own legal advisers reckoned the bill was not 
constitutional, principally because it tried to prevent recourse to 
the courts for people whose property would have been expropriated. 
Public Works Committee Chairperson Thandi Tobias-Pokolo said the 
bill was shelved because of a lack of "proper consultation".  She 
said the decision was reached after consultation with various 
stakeholders both within and outside Parliament and in the interest 
of broader consultation and effective public participation.  She 
issued a statement noting that, "Advice sought by the portfolio 
committee indicated that more time was needed to ensure that a wide 
variety of stakeholders had been consulted and that public 
participation may have been insufficient to see the bill through." 
(Beeld, August 26, 2008) 
 
----------------------------------- 
'South Africans Act like Americans' 
----------------------------------- 
Q----------------------------------- 
 
¶4. (U) Finance Minister Trevor Manuel said South Africans were not 
adequately saving.  He noted that they were highly indebted and 
consuming in a manner that mimicked patterns in the U.S.  Manuel 
said, "households live on debt and are highly leveraged.  It is not 
a basis of stability."  "If they are borrowing for consumption then 
there is something wrong in the equation," he added.  Manuel 
bemoaned the poor transition time between interest rates increases 
and consumer reactions. "The response to rate increases is abysmally 
low," he said.  By comparison he noted that when a small 
25-basis-point rate increase was announced in Europe, the response 
was immediate.  Instead, South Africans needed increases as high as 
700-basis-points "before they bite".  The current rate tightening 
 
PRETORIA 00001932  002.2 OF 005 
 
 
cycle in South Africa, which began in June 2006, is at 
500-basis-points.  Manuel continued to emphasize the need for an 
inflation targeting policy, as inflation hit the poor and those 
relying on a fixed salary the hardest.  He argued that a preferable 
price stability level would be 2%.   (Beeld, August 27, 2008) 
 
---------------------------- 
Intense Lobbying Expected to 
Pay-Off for Motor Industry 
---------------------------- 
 
¶5. (U)  Substantial concessions are expected in the new Motor 
Industry Development Program (MIDP) after intense lobbying by 
automotive manufacturers.  The Department of Trade and Industry 
(DTI's) accommodations will cost more, and the MIDP needs approval 
by the Treasury, which is reluctant to fund the program.  Finance 
Minister Trevor Manuel sidestepped questions on whether Treasury 
would agree to a more expensive program.  The automotive industry 
has complained about reduced benefits throughout the two-year review 
of the MIDP.  Treasury believes the cost of the MIDP outweighs its 
benefits.  In eleventh-hour talks, agreement was evidently reached 
late on August 27 for revisions due for release on August 29.  DTI 
is understood to have made considerable concessions to boost the 
benefit of the production allowance to satisfy industry.  The new 
deal is understood to exclude catalytic converter manufacturers - 
whose business is mainly export driven - but a separate program 
could be drafted to accommodate export-oriented manufacturers.  A 
source said: "They shook hands on a final agreement.  Some 
counterproposals were made and the minister responded to those.  The 
manufacturers liked that response."  An announcement is expected on 
September 1, after consultations with the National Union of 
Metalworkers of South Africa.  The program needs cabinet approval, 
so it is likely to be released only by the middle of September. 
Industry and government stakeholders were reluctant to speak about 
the status of the review, but one industry source said the plan 
would go for cabinet approval next week.  DTI spokesman Vukani Mde 
said an announcement was imminent but he would not give details of 
the program.  The redrafting of the MIDP was prompted by threats 
that it could be challenged at the World Trade Organization (WTO) 
because its export-incentive focus did not comply with WTO rules. 
The new program will shift from a lucrative export-based incentive 
to a production allowance.  Automotive manufacturers were concerned 
that the production allowance would not offset the loss of export 
credits sufficiently.  It is believed that DTI yielded to pressure, 
and sweetened the production allowance.  Another source said 
catalytic converters did not fit into the new parameters of the 
program, but that DTI had promised to address export-intensive 
manufacturers' needs separately.  It is understood that a new 
program could also accommodate medium and heavy commercial vehicles, 
which have also been excluded from the new program.  (Business Day, 
August 29, 2008) 
 
--------------------------------------- 
Infrastructure Spending to Boost Growth 
--------------------------------------- 
 
¶6. (U) The Nedbank Capital Expenditure Report revealed a rise in 
Q6. (U) The Nedbank Capital Expenditure Report revealed a rise in 
infrastructure investment projects.  Eighty new infrastructure 
projects valued at around R336.1 billion ($43.6 billion) were 
announced during the first half of 2008, compared with announcements 
of R194 billion ($25.2 billion) for the full-year of 2007.  Capacity 
expansion projects by state-owned electricity producer Eskom are the 
main contributor to the increase in announced projects.  A number of 
new private sector initiatives and the expansion of South Africa's 
transport infrastructure also contributed to the rise.  Sixty-four 
private-sector projects worth R72 billion ($9.3 billion) were 
announced in the first half of the year, with finance and real 
estate accounting for R38 billion ($5 billion) of these projects. 
The manufacturing sector also featured strongly with new projects 
worth R25 billion ($3.2 billion compared with R15 billion ($2 
billion) over the same period last year.  Continued buoyant 
investment growth should pick up some of the slack from a slowdown 
in consumer demand, as household spending is weighed down by a 
tighter credit environment, slower real income growth, and lower 
levels of consumer confidence.  However, strong investment growth is 
likely to lead to greater import demand, which will keep the 
pressure on South Africa's already sizable current account deficit 
(9% of gross domestic product in the first quarter of 2008) and its 
financing requirement.  Given the country's reliance on foreign 
 
PRETORIA 00001932  003.2 OF 005 
 
 
financing, the greater current account deficit adds to the 
depreciation risk associated with the currency.  (Beeld and 
ABSA-Newsletter, August 26, 2008) 
 
----------------------------------- 
Contracts Awarded for Road Upgrades 
----------------------------------- 
 
¶7. (U) The South African National Road Agency (SANRAL) has awarded 
road construction and rehabilitation company Raubex three contracts 
valued at about R1.15 billion ($151 million).  Raubex will start 
upgrading roads in Gauteng, the Western Cape, and Mpumalanga in 
September.  Raubex's Construction Division will undertake the R719 
million ($95 million) contract that formed part of the Gauteng 
freeway improvement project (GFIP) to upgrade National Route 21 
(R21).  Raubex said that the other two contracts, with a combined 
value of R428 million ($56 million), were awarded to its Roadmac 
Division.  The division would rehabilitate the N11 in Mpumalanga and 
the N1 in the Western Cape.  SANRAL is investing more than R12 
billion ($1.6 billion) in the first phase of the GFIP, which will 
improve the N1 to Pretoria, the Johannesburg ring roads, and the R21 
from OR Tambo International Airport to Pretoria.  The GFIP is aimed 
at improving the freeway network ahead of, and beyond, the 2010 FIFA 
World Cup.  (Engineering News and Fin24, August 27, 2008) 
 
-------------------------------------------- 
ACSA Utilizes Recycled Material for Upgrades 
-------------------------------------------- 
 
¶8. (U) Airports Company South Africa (ACSA) is using recycled 
materials to strengthen and widen runways and taxiways in 
anticipation of new Airbus A380 flights.  The 3.4 kilometer 
secondary runway at Johannesburg's OR Tambo International Airport 
has been strengthened.  Twelve kilometers of taxiways were also 
upgraded.  The major taxiway was doubled in width from 30 meters to 
60 meters and the central strip was strengthened to increase its 
load-bearing capacity.  The taxiways consumed about 300,000 tons of 
aggregate materials that provide bulk in road surface material. 
Sixty percent of this bulk contained recycled asphalt material. 
About 80,000 tons of other recycled materials were also used as 
sub-base material in the road shoulders.  The use of recycled 
material led to a cost savings of about R15 million ($2 million). 
Asphalt recycling is still in its infancy in South Africa, but is 
widely used overseas.  Industry leaders are keen to promote it in 
South Africa.  "It makes a lot of economic sense to recycle. The 
environmental thing also makes sense.  What we're trying to do is 
say we need to use this material optimally, to reduce reliance on 
virgin materials," said South African Bitumen Association CEO Trevor 
Distin.  Distin noted that 80% of the asphalt that comes out of 
pavements in the U.S. - about 80 million tons per year - is re-used. 
 In Europe, the volume recycled is close to 50%.  (Business Day, 
August 28, 2008) 
 
----------------------------------- 
Eskom Plans to Expand Nuclear 
Industry and Reprocess Nuclear Fuel 
----------------------------------- 
 
¶9. (U) South Africa plans to expand its nuclear industry and 
diversify its energy mix as it battles a crippling power shortage. 
The shortage has hit key mining, smelting, and manufacturing 
QThe shortage has hit key mining, smelting, and manufacturing 
sectors, trimming growth in Africa's strongest economy.  Department 
of Minerals and Energy's Nuclear Chief Director Tseliso Maqubela 
announced that state-owned electricity producer Eskom is seeking 
commercial contracts with foreign companies to reprocess spent 
nuclear fuel.  Maqubela told Reuters: "The preference is that we 
will use existing commercial reprocessing plants in the world for 
reprocessing spent fuel."  He noted that "in the medium to long-term 
we will also look at whether it's economically viable to establish a 
reprocessing plant in South Africa, but economically it makes sense 
in the short-term that we use existing facilities."  Eskom plans to 
spend R343 billion ($45 billion) over the next five years to boost 
generation capacity.  France, Britain, and Japan were likely 
countries with whom to partner on the reprocessing project, 
particularly with companies such as France's Areva and U.S.-based 
Westinghouse Electric, which is majority owned by Toshiba.  "The 
contracting would be done by Eskom, not by government so I would be 
hesitant to give a figure," Maqubela said on the potential value of 
the contracts.  "Quite clearly something like this would be in the 
 
PRETORIA 00001932  004.2 OF 005 
 
 
millions of dollars, definitely," he said.  Maqubela said 
radioactive waste will probably be shipped overseas, where the spent 
fuel is reprocessed to produce a "mixed oxide fuel" for re-use in 
nuclear reactors.  South Africa, which has Africa's largest uranium 
reserves, has categorized uranium as a critical mineral.  The 
recently approved nuclear policy also permits uranium mining to 
ensure supply security.  The government plans to regulate uranium 
exports to secure supplies to Eskom.  South Africa plans to build 
24-30 new Pebble Bed Modular Reactors (PBMR), with construction of 
the first demonstration model planned for 2010. The plant would be 
commissioned in 2014, followed by the commercial reactors three 
years later.  Westinghouse Electric, Eskom, and South Africa's 
Industrial Development Corporation are investing billions of Rands 
to prove the PBMR technology.  (Engineering News and Reuters, August 
27, 2008) 
 
------------------------------------------ 
Gold Firms Battle Costs and Falling Output 
------------------------------------------ 
 
¶10. (U) New chief executives of Africa's top three gold producers 
are seeking novel ways to cut costs and expand output to stay 
afloat.  AngloGold Ashanti, Gold Fields, and Harmony Gold 
(respectively, the world's third, fourth, and fifth-largest 
producers) have been bailed out thus far by a strong gold price. 
Gold hit a lifetime high of $1,030.80 in March, but a global 
economic slowdown has since seen prices tumble to around $826, 
removing a shield from ballooning costs and weak output in South 
Africa.  Analysts said companies have had to dig deeper into mines 
that are already the world's deepest, pushing costs higher and 
heightening safety risks at a time when the South African mining 
sector is hit by a shortage of skilled labor and a spate of labor 
strikes.  Analyst Nick Goodwin said, "The margins between costs and 
the gold price are shrinking, as the companies try to dig out a 
wasting asset."  Shares of the three firms have underperformed gold 
peers in North America and Australia and failed to fully participate 
in the gold price rally due to a stronger rand, high costs, power 
shortages, and safety shutdowns.  AngloGold is favored by investors 
compared to its African rivals owing to a wider production base 
outside South Africa, which contributes about 40% of its output, and 
the group's relatively lower costs.  Gold Fields has some 80% of its 
total output from South Africa where safety shutdowns slashed 1.1 
million ounces from its reserves.  Gold Fields' new CEO Nick Holland 
wants the group to change from an Afro-centric company and has 
tinkered with management structure, after having lost three top 
executives this year.  "All of this activity is happening at a 
difficult time operationally for Gold Fields' South African mines," 
JP Morgan analysts Steve Shepherd and Allan Cooke said.  Holland 
wants to keep a tight rein on costs rather than look to be bailed 
out by the gold price.  Gold Fields' production and capital 
expenditure rose to $869 an ounce in the June against a gold price 
of $895, reflecting a tight margin.  Holland wants to cut this to 
$725.  Harmony Gold CEO Graham Briggs has sold mines and slashed the 
Q$725.  Harmony Gold CEO Graham Briggs has sold mines and slashed the 
workforce.  Analysts said Harmony must find higher-margin, 
lower-risk mines and sell the low-grade mines on which it was 
founded.  AngloGold CEO Mark Cutifani has targeted expansions 
outside of South Africa, with newly acquired mines in Brazil and 
Argentina, a strategy also favored by its rivals as they seek to 
diversify.  Harmony broadened its global footprint with the 
joint-venture Hidden Valley project in Papua New Guinea.  Gold 
Fields' has bet its expansions on a $550 million Peru mine.  (Mining 
Weekly and Reuters, August 27, 2008) 
 
----------------- 
Engen Comes Clean 
----------------- 
 
¶11. (U) Durban-based petroleum refinery and fuel supply group Engen 
claimed to have spent over R60 million ($7.8 million) on 
environmental improvements over the last decade and to have reduced 
its emissions by 60%.  Managing Director Willem Oosthuizen described 
the investment as a part of Engen's efforts to receive an ISO 14001 
certificate.  The ISO 14001 is administered and enforced by the 
South African Bureau of Standards, and the process for certification 
entails rigorous site emissions audits.  Each plant must create a 
monitoring system to track potential negative environmental impacts 
in order to comply with the ISO process.  Oosthuizen said it was a 
"milestone that was part of a journey which Engen started in 1999 
when the refinery started voluntary emission reductions."  Community 
 
PRETORIA 00001932  005.2 OF 005 
 
 
Liaison Forum's Environmental Representative Lawrence Vartharajulu 
congratulated Engen and noted that there was still room for 
improvement.  (Engineering, August 1-7, 2008) 
 
---------------------------------------- 
MTN Boosts Profits and Pursues Expansion 
---------------------------------------- 
 
¶12. (U) Sub-Saharan Africa's biggest mobile phone operator MTN 
posted a 26% rise in first-half adjusted earnings per share (EPS). 
The South African-based company said the adjusted EPS was in line 
with the company's forecast for a rise of 23.3 to 28.3%.  Subscriber 
numbers jumped 53% to 74.1 million.  However, MTN lost market-share 
in Nigeria (from 44% to 43%) as it faced stiff competition from the 
arrival of Kuwait's Zain Telecom.  Subscriber numbers in Nigeria 
increased 12% to 18.6 million.  Growth also slowed in South Africa, 
where the market is maturing and competition is cut-throat, with a 
5% rise in subscribers to 15.6 million.  MTN held failed merger 
talks this year with India's Bharti Airtel and Reliance 
Communications.  Some analysts say it could still fall prey to a 
foreign buyer.  MTN did not give concrete forecasts, but said 
prospects for the second half remained "positive" despite 
increasingly competitive markets.  It said it would focus on 
expanding in emerging markets.  MTN has been banking on its new 
venture in Iran, which some investors deem risky given Iran's 
nuclear stand-off, to boost subscribers as growth in Nigeria and 
South Africa slows.  It said Irancell boosted its subscriber base by 
93% to 11.6 million.  (Engineering News, August 28, 2008) 
 
--------------------------------------- 
SEACOM Cable Project Moving on Schedule 
--------------------------------------- 
 
¶13. (U) SEACOM announced that about 10,000 kilometers of the 15,000 
kilometer SEACOM fiber-optic, undersea cable has already been 
manufactured in the U.S. and Japan.  "Our manufacturing and 
deployment schedule is on target and we are confident that we will 
meet our delivery promises in what is today an incredibly tight 
market underpinned by a skyrocketing demand for new cables and 
resulting in worldwide delivery delays," said SEACOM President Brian 
Herlihy.  The SEACOM cable has been structured to meet the policy 
objectives of participating governments and the New Partnership for 
Africa's Development (NEPAD), and will be the first to launch 
services with a planned ready-for-service date of June 2009.  The 
cable's two fiber pairs will have a capacity of 1.28 terabits per 
second, to enable high-definition television (HDTV), peer-to-peer 
networks, and Internet Protocol Television.  Once completed, it will 
connect Southern and East Africa with Europe and South Asia and help 
meet the surging demand for lower-priced Internet on the African 
continent.  Project contractor Tyco Communications will begin 
shipping terrestrial equipment this month.  SEACOM also reported 
that laying of shore-end cables for each of the landing stations 
would also start in September.  "We are very happy with the progress 
made over the past five months.  From October 2008, the first of 
three reliance class vessels will start laying the actual cable. The 
final splicing, which involves connecting all cable sections, will 
Qfinal splicing, which involves connecting all cable sections, will 
take place in April 2009.  This is expected to allow enough time for 
systems testing before the commercial launch in June.  The cable is 
planned for service before the 2010 FIFA World Cup kick-off and 
SEACOM has been working with key broadcasters to meet their 
broadband requirements.  The team is also trying to speed up 
construction in an attempt to assist with the broadcasting 
requirements of the FIFA Confederations Cup scheduled for June 
¶2009. 
 
BOST