Fixed investment outlook positive

3 February 2006

Fixed investment activity in South Africa has accelerated sharply over the past three years, with growth rates approaching levels last seen a decade ago, according to Nedbank’s latest report on capital expenditure in the country.

According to the report, fixed investment in SA has now been growing for 22 consecutive quarters, with impressive growth rates of 8.3% in 2003 and 8.8% in 2004 carrying over into 2005 – and could grow by over 10% a year over the next five years.

This has helped to take fixed investment as a percentage of gross domestic product (GDP) in South Africa up to 16.5% in 2004 from 15.1% in 2000.

While this investment-to-GDP ratio still lags the 20% and higher levels seen in high-growth developing countries, “there is increased optimism that the current investment boom will be sustained over the longer term,” Nedbank senior economist Nicky Weimar said in a report highlighting the findings of the recently updated Nedbank Capital Expenditure Project Listing.

New capital projects
Fixed capital formation appears set to grow at a rapid pace over the next two to five years, Weimar said.

“Nedbank’s project listing shows a sharp increase in new capital expenditure plans in 2005 which, coupled with the massive infrastructure projects announced in 2004, should produce strong growth rates in overall investment activity over the next few years.”

Weimar said the 2010 Football World Cup was a major influence on capital expenditure plans, but that there was also a general rise in new projects in the manufacturing and mining sectors.

“This suggests that confidence in the economy has improved and that businesses remain determined to maintain and expand their penetration of export markets,” she said.

Nedbank’s listing shows that 106 new projects worth around R166-billion were announced in 2005, compared with 64 new projects worth R60-billion in 2004. (The 2004 figure excludes the government’s announcement of a major infrastructure upgrade drive, including the R40-billion and R95-billion plans of state companies Transnet and Eskom.)

The listing comprises capital projects valued at over R20-million that lead to an expansion in output rather than just a replacement or upgrade of existing capacity.

The bulk of new projects announced in 2005 came from South Africa’s private sector (projects worth around R134.9-billion), with the manufacturing sector recovering strongly (projects worth around R68.2-billion).

According to Weimar, many industries in the country plan to expand capacity on growing expectations of rising building and construction activity ahead of the 2010 World Cup and on hopes of continued strong global demand for commodities.

Five big projects announced in the basic iron and steel industry in 2005 were:

  • Mittal Steel’s R8-billion expansion and upgrade of its Vanderbijlpark, Newcastle and Saldanha steel plants.
  • The IDC’s R3.3-billion titanium project.
  • Highveld Steel and Vanadium’s R1.6-billion upgrade of its Witbank plant.
  • International Ferro Metals’ R1.4-billion plan to construct a ferrochrome smelter near Buffelsfontein in North West province.
  • Tata Steel’s R650-million plan to construct a high-carbon ferrochrome smelter in Richards Bay.

Cement and building supplies
South Africa’s cement and building supplies industries have also started to gear up for the expected construction boom, with new projects worth around R4-billion announced in 2005. These include:

  • PPC’s R1.3-billion expansion of its Dwaalboom cement factory in Limpopo province.
  • Lafarge’s R1-billion expansion at its Lichtenburg cement works.
  • The PG Group’s plans to construct a new glass manufacturing plant in Springs and upgrade its plants in Port Elizabeth and Garankuwa near Pretoria.

Vehicle manufacturing
Motor vehicle manufacturers in South Africa remained aggressive investors in 2005, according to Nedbank’s listing, with confidence levels high despite uncertainty over the future of the state’s Motor Industry Development plan.

Projects worth around R7-billion were announced in 2005, with DaimlerChrysler, General Motors, Toyota and Volkswagen either improving flexibility of operations or expanding capacity to produce new models for both the domestic and export markets.

South Africa’s mining sector was also prominent among the new projects in Nedbank’s listing, with around R32-billion worth of investments planned for the next five years. While the platinum mining industry again featured strongly, the new projects were spread more evenly and capital expenditure plans in the gold and iron ore mining industries increased sharply in 2005.

Gold mining projects included:

  • Harmony Gold’s R600-million Elandsrand project to exploit a potential 9.8-million ounces of reserves.
  • DRD’s ambitious R8-billion Argonaut Project to extend the Central Rand Goldfields.
  • Gold Fields’ R1.8-billion Driefontein depth-extension project.

Two iron ore mining projects were announced: Kumba Resources’ R3-billion expansion of its Sishen operations, and a R1-billion development of a new open-pit mine in the Kgalagadi region of the Northern Cape.

Government projects
Nedbank’s listing shows a strong rise in government plans, with 10 new projects worth R17.5-billion announced in 2005 – mostly infrastructure upgrades and expansions ahead of the 2010 World Cup, but also to address anticipated future infrastructural bottlenecks.

The focus of these plans is on upgrading areas around major sporting venues and tourist attractions, as well as on expanding water and road infrastructure.

The Airports Company South Africa is also busy preparing for 2010, with the announcement in 2005 of R3.4-billion worth of expansions to both the domestic and international terminals at the Johannesburg and Cape Town airports.

However, capital expenditure plans by state companies declined sharply in 2005, coming as they were off a very high base.

“However, actual investment spending by public corporations should remain strong during the next five years as Transnet and Eskom start to roll out their massive R135-billion expansion programme,” Weimar said.

Much depends on government delivery
Fixed capital formation in South Africa appears set to grow at a rapid pace over the next two to five years, Weimar concluded.

“However, much will depend on the public service’s ability to deliver on the ambitious plans set out for general government, Eskom and Transnet.

“The political will and urgency appear to be in place, but real constraints remain in the form of severe shortages of skilled labour and project expertise.

“If these challenges can be overcome, if the manufacturing sector is able to withstand the effects of the strong rand, and if conditions for external financing remain favourable, growth in fixed investment of over 10% per annum seems achievable over the next five years.” reporter