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UPDATE - SOUTH AFRICA - MAY/JUNE 2009
By Alan Jones, Safmarine's Senior Key Account Executive, South Africa
Trade status and six month forecast:
• January to March 2009 were difficult months for the South African market and the next six months (June to December 09) are likely to remain challenging.
• Compared to the first quarter of 2008, South Africa's imports for the first quarter were down approximately 25% and exports, approximately 20% down, across all trades, according to statistics provided by SAPO.
• Consumer confidence in 2008 and early 2009 had been negatively impacted by the spate of interest rate increases announced between June 2007 and March 2008 and it is likely to take some time before the market reacts positively to the recent interest rate reductions (which began in December 2008); this is because there is usually a lag of six to nine months before the impact of the reduction/increase is seen in the market.
• We expect additional interest rate reductions will be announced throughout 2009 in an effort to boost consumer confidence and encourage spending and borrowing. This is needed in order to stimulate the South African economy; only once the economy is stimulated is recovery likely.
• Business in South Africa is likely to remain challenging for the next three months although the June to September 2009 period could prove slightly more positive as the first of the interest rate reductions - announced in December 2008 - begin to filter through.
• Another reason for a possible upswing in trade could be the onset of the 'peak season' - traditionally from June to August. This is the period when the retail sector imports goods for the Christmas season. However, it is unlikely that the peak season would start in June this year; we expect it to kick in later than usual (in 2008, the peak season started six weeks late and was shorter than usual).
• A factor which could strengthen the peak season volumes would be the decision - by SA importers who have reduced inventories since 2008 to the bare minimum in order to save costs - to replenish these inventories in anticipation of an upswing in consumer confidence towards the last three months of the year (as the interest rate reductions filter through).
• Although we are optimistic there will be an upturn in the next six months of 2009 (compared to first six months) we are not sure to what extent. We are, however, unlikely to have the peak season flows we enjoyed in the years preceding 2008.
• Traditionally, as South African import volumes go down (because the Rand is weak and imports become more costly), we see an increase in exports as South African goods become more cost competitive. Currently, even though the Rand is at a favourable level, both exports and imports are down because of present market conditions/the global economic downturn. So South Africa is being hit by a 'double whammy'.
• The bulk of South Africa's imports tend to be consumer products and the drop in imports is primarily due to the fact that consumer spending has slowed as a result of the interest rate increases in 2007/2008. In addition the stricter application of the National Credit Act and the weakness in the Rand has had a major impact.
• Local exports have slowed as a result of the slowdown in our traditional markets.
• Commodity exports are being negatively influenced by reduced global demand as countries such as China and India see demand for their goods slow and they require lower tonnages of raw materials.
• When importers in the traditional markets such as the USA, Europe and Far East cut back on orders it counteracts any 'weak Rand' benefits; this means that South African manufacturers cannot take advantage of the weak Rand as they would be able to in a more positive world trading environment. (Traditionally, when the Rand weakens to between R7 and R8, exports usually increase; however, this trend has been negatively impacted by the slowdown in many global economies.)
Global economic downturn - SA:
• As a result of the global economic downturn we have seen several customers make cost cutting drives; the cuts are across all industries and in all areas of business, including logistics and transport.
• "Shipping has been through many cycles but never before, in my 40 years in the industry, have I witnessed a downturn on the scale or nature that we're currently experiencing. Over the years we have had exchange rate fluctuations, oil price fluctuations, market crashes and economic slowdowns but never all together, at the same time! In the past a downturn in one part of the world would encourage South Africans to focus on another part - now, all markets are affected. This has resulted in the biggest, most wide-spread slump I have seen in 40 years of shipping."
• It will be important for companies to manage their way through the current downturn in order to benefit from the turn around, when it comes. Companies should do everything possible to avoid cutting back on key staff in order to save costs and look to alternative cost saving methods . "Key staff will get you through the crunch and enable you to capitalise quicker on the upturn when it comes."
• South African business needs to look long-term while managing the short-term implications of the downturn. They should focus on recovering losses as quickly as possible; failure to do so will result in them taking longer to recover.
• Financial markets are beginning to show signs of improvement and the oil price is starting to creep up - these factors could be an early indication that we are entering a more positive trade period.
Auto:
• Motor vehicle sales are down by more than 30% in South Africa (as a result of the spate of interest rate increases in 2007/2008 and the stricter application of the National Credit Act, amongst other factors).
• Export volumes of motor vehicles and parts manufactured in South Africa have also reduced, as a result of reduced global demand. The markets South Africa has been selling to are in recession; these markets are buying less even though the low Rand is in their favour.
• The auto industry is one of the sectors which has been hardest hit by the economic slowdown; in fact, the auto industry in SA is having one of its worst years in decades.
• The automotive industry tends to be a barometer for the entire South African economy; when car sales are high it usually indicates a positive upswing for manufacturing, retail and other sectors. The converse applies when car sales are down.
• From a Safmarine perspective, the automotive industry constitutes a significant percentage of Safmarine's imports and exports. The drop in demand for automotive products is therefore having an impact on Safmarine's business - as well as shipping lines in general.
Capacity and rates:
• The depressed global economy has resulted in significantly reduced containerized traffic. (When cargo volumes reduce, the result is an over-capacity situation (ie there is more vessel space than demand for the space). When available space is greater than demand for the space, shipping rates tend to go down. Should a service become loss-making because of low rates, shipping lines may decide to withdraw the service entirely, a situation which in the end affects the importer/exporter as he/she no longer has the same access to a market. It is therefore in the interests of both parties (shipping line and cargo owner) to keep rates at an acceptable level in order to ensure the viability of a trade/service).
• Rates are, in the end, a factor of supply and demand but the current levels are even lower than expected, because of the prevailing global economic situation. The rate reductions are also more widespread - ie a number of trades have been are affected. Furthermore, both import and export rates on South African routes have been impacted by the surplus capacity situation; imports (from Far East in particular) more so than exports.
• The South Africa Europe trade is the trade which has been slightly less affected probably because it is a more stable, traditional trade. It is also one of our oldest trades and not a high growth trade and as such, has proven less volatile than other trades.
World Cup 2010
• Fifa World Cup 2010 is unlikely to have a major impact on South African shipping volumes between now and June next year. The local tourism, hospitality, retail and allied industries are likely to be the industries which derive the most benefit from the event; not so shipping or general imports and exports (with the exception of small volumes of sponsor-related goods which will be imported for the event).
As at 22 May 2009
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