Market analysts have warned that the reduction of mining activities, both locally and in economies highly dependent on the export of limited diversification in commodities poses an immediate threat to the survival and profitability of the large retailer industry.
Internationally, the mining industry is currently one of the most vulnerable sectors due to the combination of a global surplus of output in many commodity markets and a lower than expected growth rate in China that continued to underpin the market weakness.
2016 began with a drastic downturn in commodity prices amid lower Chinese demand and uncertain global economic growth. The slowdown in the Chinese economy was attributed to causing a global commodity price drop as the world’s second biggest economy accounts for almost 40% of the world’s metals commodity demand, according to the World Bank 2015 Report. In spite of the Chinese economic down turn it continues to be an insatiable user of natural resources.
Speculation of a Chinese hard landing were however reduced mid-year as supply of commodities begun to adjust to current demand encouraging commodity prices in general to steadily escalate. The general concern by Commodity Markets showing that it is unlikely that commodity prices will recover to their pre-commodity crisis level due to subdued demand fuelled by sluggish global economic growth given the threats presented by Brexit and the ascendance of Donald Trump at the helm of the United States of America.
Keith Jefferies, an independent economic veteran at E-consult Botswana has expressed concerns that mining will not be profitable in future, inciting fears that more mines are likely to wind up operations or lay off employees to right-size labour.
The diamond and polishing industry which employs over 4000 people in Botswana, faced with poor uptake of the commodity and mismatch in prices has seen about 1 500 jobs losses between 2015 and 2016, economists have observed. Recently Selibe Phikwe’s BCL mine and its spinoff, Tati Nickel in Francistown wound up operations causing job losses to over 5000 employees. In both Phikwe and Francistown giant retailers listed on Botswana Stock Exchange such as Choppies Holdings Limited, Furnmart and Sefalana Holding Limited have a sizeable presence.
As mines retrench or close down, towns such as Phikwe face an exodus of income earners and this directly translates to a loss in customers and revenue, Moemedi Mosele, a Research Analyst at Motswedi Securities contends. Waning uptake, he says, results in longer storage and even spoilage at retail stores in and around such mining communities.
Choppies a leading mass grocery retailer in Botswana, says its South African business, other than the newly acquired business, Jwayelani, incurred significant losses occasioned by very depressed trading in areas dominated by mining. The retailer has leveraged the traditional supply route between Johannesburg and Gaborone by opening stores in small towns en route in South Africa.
However in its 2016 annual report, the Chief Executive Officer Ramachandaran Ottapathu says just over half of these stores are located in hard hit ‘mining towns’, which have seen significant decline in footfall due to falling levels of employment noting however that, “despite these challenges, gross profit margins in South Africa remained strong in the year.”
Elsewhere, In Zambia, where Choppies has established a presence, with the first store opening in November 2015, Ottapathu says difficult macroeconomic conditions in the country with the downturn in the mining sector and power cuts presented major economic and operational challenges which notwithstanding, Ottapathu believes there is good long-term potential due to recent noticeable price growth in agri-based commodities. “Once we have achieved critical mass we expect margins to improve,” he said.
Still in Zambia, Furnmart, a domestic furniture and electrical appliances retailer revealed that it has commenced the winding up of the Zambian operations on the 1st November 2016. This follows management’s concern over the material weakening of the Zambian Kwacha.
Mosele, says the depreciation of the Kwacha is directly linked to copper prices. Copper is the principal export commodity in Zambia. “It is difficult to look at an economy in a simplistic two sector model, however economies highly dependent on one or two commodities tend to suffer a great deal if for one reason or the other the economy cannot get its major export to the market.” Mosele points out and highlighting that when challenges such as these arise, the general concern is that the economy loses Foreign Direct Investment, followed by capital flight, or disinvestments (in the case of Furnmart), which all tend to push economies into recession.
With copper prices at current levels and the general slowdown in global economic growth offering no brighter outlook, Mosele says the continued pressure on the company’s operations leaves little to be desired.
However, this is before the recent fair economic growth in China and Trump’s proposed spending. Furthermore, Mosele says other complications with the Zambian operations, beyond the slow growth prospects may also have motivated the move to disinvest. “If the retailer’s operations are financed in Pulas, or Rands and income is earned in the sinking Kwacha while rent is most likely paid in Dollar (appreciating against the Pula), you have a scenario were your costs are growing while your revenue is falling.” This is because the cheaper Kwacha will have to be converted back into Pulas, incurring loses while the business has not necessarily been underperforming.
In Botswana, the economic impact due to the closure of BCL and Tati is yet to be felt though the trend in the mining areas in Zambia and South African is expected to arise.
