Brace for more fuel shortages, blackouts
Supply-side crisis likely to get worse on economic growth, commodities boom
August 20, 2007
By INGI SALGADO
Cape Town - Just about every bit of spare capacity in the South African economy is being soaked up. And it is likely to get worse before it gets better.
During the next few years, consumers should brace for further fuel shortages and electricity blackouts. Industry will have to contend with continuing shortages in domestic production of raw materials such as steel and cement. The government's hands will be full devising the means to ease bottlenecks while its huge infrastructural spending programme unfolds.
Against this backdrop is the skills deficit that has bedevilled the economy in various guises for decades.
The primary cause of South Africa's supply-side crisis is sustained higher growth fuelled by the unprecedented boom in global commodity prices since 2001.
"Any country with as high growth as we have seen in the last three to five years is going to run up against a range of supply-side constraints in the context of increasing consumer demand," says Udesh Pillay, executive director of the Human Sciences Research Council's urban, rural and economic development research programme.
"The economy is not able to keep up," he says.
One of the traditional measures to assess spare capacity is the capacity utilisation rate in the manufacturing sector. The last few years have produced an upward trend from the long-run average of about 80 percent. In the first quarter of 2007, the rate was 85.8 percent.
South Africa is not the only nation experiencing a capacity crunch.
"Capacity problems are a global phenomenon at the moment," says Adenaan Hardien, Cadiz African Harvest economist, pointing out that supply-side problems in certain sectors extend to all corners of the globe.
Emerging economies like India and even developed nations like Australia have been hit by insufficient logistical capacity in rail, port and road.
In South Africa, the bottlenecks are pronounced in sectors in which there is substantial state involvement, such as power, transport and telecommunications, and those that are dominated by monopoly entities, such as steel, says Hardien.
For example, Transnet's historically weak freight rail services have forced business to employ long-haul road trailers. Eskom's failure to invest in new capacity until recently has pushed the level of demand dangerously close to generating capacity.
But bottlenecks do not just arise because of too little investment in the past. Inefficiencies also play a role.
Pillay says that power outages have occurred less because of supply shortages than because of inefficiencies in supply-chain management.
Inefficiencies in the telecoms industry have resulted in high prices for, among others, value-added services like broadband, thus constraining business' ability to expand capacity.
In the petroleum sector, Sipho Mkhize, chief executive of state-owned synthetic fuel producer PetroSA, says South Africa does not have sufficient reserves of fuel and if unscheduled maintenance shutdowns at refineries occur, temporary imports have to make up for lost production.
However, he says, the capacity constraints that have led to fuel shortages do not necessarily come from the supply-side up to the refinery. A big problem is in the logistics of delivering from the refinery to retail outlets.
"The system just can't take it," says Mkhize.
Delivery problems were highlighted by the recent petroleum sector strike. A three-week reserve margin ensured supplies were available even though two refineries shut down. But the strike hampered the delivery of fuel from depots to petrol stations. There are also capacity problems in the transport of fuel to inland areas.
One of the biggest supply-side constrictions is the availability of key forms of skilled labour. Again this is a worldwide phenomenon, although the South African debate is characterised by high levels of race consciousness arising from different views on the impact that affirmative action has had on skills availability.
Another key constraint is the mismatch between available levels of raw materials and the pace of economic growth. Key shortages of steel, cement, gas, fertilisers, newsprint, glass and soft drinks, among others, have been reported.
Three of South Africa's four cement producers are building new plants to meet demand, which surged 13 percent in the first half of the year. A 5 million ton shortage last year has led to high levels of cement imports.
On the steel front, South Africa's biggest producer, ArcelorMittal SA, sold 78 percent of its production domestically in the first half of 2007 compared with 67 percent the previous year. It is struggling to keep pace with demand for certain steel grades, and is spending almost R12 billion up to 2011 to expand.
Shortages of gas have been estimated at 20 percent this year. Gas company African Oxygen has commissioned a 3 600 ton import and storage facility to ease shortages of liquefied petroleum gas, and is due to commission a new carbon dioxide facility to ease the shortages that have knocked soft drink manufacturers.
Pillay believes South Africa's capacity shortages have stabilised over the last 18 months due to larger reserves of skilled labour and supplies of raw material through imports. In the run-up to 2010, the country will continue to rely on these external sources of support.
Both sets of constraints - labour and raw materials - detract from the ability of parastatals to deliver on their infrastructure spending programmes: in particular Eskom's five-year R150 billion capital expenditure plan to add 40 000 megawatts of generating capacity over the next two decades, and Transnet's R78 billion investment over the next five years to expand capacity of its ports, rail freight and pipeline assets.
Hardien says: "We have to invest in new capacity because we have hit capacity constraints, but the ability to deliver on projects is itself impacted. It's one thing to say we want to expand the rail network, but if we can't get tracks or people to lay them, then plans will remain just plans."
Pillay is worried about another catch-22 situation. Vast amounts of infrastructure spending lays the basis for consumer spending, and these higher levels of demand keep raising the bar for supply.
"You have a continuous mismatch of supply. I can't see a levelling point in the next five to seven years."
Volume growth associated with strong demand, combined with elevated levels of capacity arising from capital spending, imply good profits for the private sector.
But supply-side constraints boost imports and inflate the deficit on the current account of the balance of payments, which swelled to about 7 percent of gross domestic product (GDP) from a surplus five years ago.
Pillay is worried that if the deficit reaches around 10 percent of GDP, it will impair the fundamentals of the South African economy, and reinforce some of the supply-side constraints.
Until such time as investment in new capacity starts to kick in, South Africans will have to vasbyt.
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