Cablegate: South Africa Economic News Weekly Newsletter

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R 081433Z FEB 08





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1. (U) Summary. This is Volume 8, issue 6 of U.S.
Embassy Pretoria's South Africa Economic News Weekly

Topics of this week's newsletter are:
- Sector Focus: Auto Industry
- Car Sales Hammered By Rising Inflation, Interest
Rates and Debt
- New Subsidy Program for Auto Producers
- GM Expands SA Presence
- Ford Increases Investment and Localization
- Renault to Invest in New Plant
- SA to Import Chinese Vehicles
- Power Crisis Leads to Executive Shakeup
- Infrastructure Problems Affect Production
- Coega Aluminum Project Cast in Doubt
- Power Cuts Put Rand on Rocky Road
- Business Confidence Falls to Four-Year Low
- SADC to Boost Air Transport
- Vodacom Offers Free Upgraded Internet
- DEAT Bans Abalone Diving
End Summary.

Sector Focus: Auto Industry

2. (U) The South African auto sector makes up about
10% of manufacturing exports. In 2006, the industry's
capital expenditure reached a record R6.2 billion
($800 million). Overall passenger vehicle sales rose,
while import sales exceeded locally-produced vehicle
sales for the first time in 2007. As a result,
analysts expect the 2007 auto industry trade deficit
to remain at 2006 levels, at around R33 billion ($4.2
billion). A number of manufacturers are increasing
investments and focusing on exports for 2008. The
government is offering new incentives to boost
production and exports to decrease the auto trade

Car Sales Hammered By Rising Inflation,
Interest Rates and Debt

3. (U) According to the National Association of
Automobile Manufacturers of South Africa (NAAMSA), new
vehicle sales decreased from 52,212 units in January
2007 to 47,296 units in January 2008, a drop of 4,916
units, or 9.4% y/y. Passenger car sales increased by
14.6% y/y to 30,483 units in January 2008, while
medium and heavy commercial vehicle categories
remained strong, rising 27% and 14% y/y, respectively,
supported by strong infrastructure spending. Nedbank
Chief Economist Dennis Dykes said, "The latest vehicle
sales figures show that household confidence continues
to fade as the pressure of higher inflation, higher
interest rates and higher debt burdens continues to
build. Household spending is expected to slow as the
year progresses." Since June 2006 the Reserve Bank
has hiked interest rates four percentage points to
curb inflation fuelled by rising food and fuel prices.
The passage of the National Credit Act in - 2007 also
made it more difficult for marginal borrowers to
obtain credit. (Business Day, February 5, 2008)

PRETORIA 00000268 002.2 OF 007

New Subsidy Program for Auto Producers

4. (U) The South African Government's goal for the
local auto industry is to produce 1.2 million vehicles
a year by 2020. This target is taking center stage in
the drafting of a new policy to replace the current
export-based Motor Industry Development Program
(MIDP). A new program is likely to subsidize vehicle
manufacturers, which achieve annual production of
50,000 units or more per vehicle platform. Vehicle
production decreased significantly in 2007, but is
expected to pick up in 2008. The industry manufactured
around 535,000 vehicles for local and export markets
in 2007, down 8.9% y/y from the 587,000 units produced
in 2006. The projected production figure for 2008 is
619,600 vehicles. National Association of Automobile
Manufacturers of South Africa Executive Manager Norman
Lamprecht said 2007 local production most likely took
a knock on the back of a slowdown in domestic vehicle
sales. A drop in export sales also dented vehicle
production, with several companies spending 2007
gearing up for new export programs, says Lamprecht.
Vehicle exports reached 179,859 units in 2006, but
eased to 171,260 in 2007. Lamprecht expects exports
to jump 49% y/y to more than 255,000 vehicles in 2008,
"especially as the Toyota Corolla and Mercedes-Benz C-
Class export programs start peaking". (Engineering
News, January 25, 2008)

GM Expands SA Presence

5. (U) General Motors South Africa (GMSA) will invest
R481 million ($62 million) to upgrade its tooling and
production facilities in 2008. In addition,
construction is under way at a new vehicle conversion
and distribution center in Aloes, in Mpumalanga. This
multimillion rand storage and logistics facility is
due to open during the second quarter of 2008. Other
plans include the launch of ten new products in 2008
slated to boost market share. This continues the trend
set last year, when the company also launched ten new
vehicles. GMSA's retailer network, now standing at
152 outlets, invested R812 million ($105 million) over
the past few years in upgrading its facilities. A key
area for GMSA going forward is the light commercial-
vehicle (LCV) market, where it secured an overall
share of 23% in 2007, through buoyant sales of the
Isuzu KB and Corsa Utility pick-ups. (Engineering
News, February 1, 2008)

Ford Increases Investment and Localization

6. (U) Ford announced a R1.5 billion ($215 million)
expansion program to expand operations for its next
generation compact pickup truck and its turbocharged
Puma diesel engine. Construction will begin in 2009.
QPuma diesel engine. Construction will begin in 2009.
Ford will begin manufacturing the pick-ups at its
Silverton assembly plant in Pretoria in 2010 and the
diesel engines at its engine factory in Struandale, in
Port Elizabeth in 2011. Ford South Africa CEO Hal

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Feder said South Africa was a highly capable and
proven export source that could "successfully deliver
at the highest level of global competition". The
investment is expected to increase annual capacity at
the Silverton plant from 60,000 to 110,000 vehicles,
with 75% of the pickups destined for export to Europe,
the Middle East and the rest of Africa. The
Struandale plant will raise annual production for its
Puma diesel engine and components to about 180,000
units, with the majority being exported. Ford plans
to increase spending on local components from an
annual R441 million ($57 million) to R2.9 billion
($0.4 billion) by 2011. Ford currently achieves about
35% local content, which will improve to more than 60%
when production begins. Ford has 4,500 employees at
the two plants and expects to hire as many as 500 more
by 2011. Ford estimates that an additional 4,000
indirect jobs will be created as the domestic auto-
parts industry supplies parts for both a greater
number of vehicles and a larger percentage of local
content. (Business Day, February 1, 2008 and Ford
January 30, 2008 Press Release)

Renault to Invest in New Plant

7. (U) DTI Officials told Embassy Economic Officers on
February 4 that Renault plans to invest in a new,
greenfield automobile assembly plant that will take
advantage of the same MIDP incentives that were
incorporated into the above-mentioned Ford expansion.
This will be Renault's first production facility in
South Africa and production will be about 100,000
vehicles per year. The main difference between the
two investments is that the expanded Ford plant in
Silverton will replace five low-volume existing
production lines with two high-volume lines, while the
Renault plant will introduce a completely new line for
the Sandero hatchback in a completely refurbished
former Nissan plant in Guateng.

SA to Import Chinese Vehicles

8. (U) McCarthy Limited signed a distribution
agreement with Chery Automobile Company of China to
import Chinese-made cars to South Africa starting
April 2008. Chery estimates that sales volume will
exceed 5,000 units by the end of 2008. McCarthy
Import and Distribution Executive Director Jolyon Nash
said, "Details of the models we will market in South
Africa are still being finalized." Chery Automobile
Chairman Yin Tongyao was "pleased to be a player in a
market that will provide a springboard for sales of
our products into other African countries". Chery is
the fourth-ranked Chinese automobile manufacturer in
passenger car production. (Business Day, February 1,

Power Crisis Leads to Executive Shakeup
QPower Crisis Leads to Executive Shakeup

9. (U) Eskom replaced Ehud Matya as head of it's
Primary Energy and Power Plant Division in the

PRETORIA 00000268 004.2 OF 007

aftermath of weeks of crippling power generation
problems. On February 4, 2008, Eskom had 3,000
megawatts out of commission due to planned maintenance
and 2,388 megawatts unavailable due to unexpected
outages. An additional 4,060 megawatts was offline
due to load losses resulting from either poor quality
coal or wet coal. Maroga said: "We are undoubtedly
experiencing one of our most difficult periods in
Eskom's recent history, as power supply interruptions
reach a level that is unprecedented in South Africa."
Brian Dames will now be responsible for primary
energy, power plants, and capital investment.
According to an Eskom spokesperson, CEO Jacob Maroga
wanted the various components of power generation
consolidated under one manager. Matya, who remains a
company executive, will be responsible for negotiating
power buy-back from big industrial users. The
management shake-up means that Dames will continue
heading up the investment of R300 billion ($39
billion) in new power plants in the next five years,
in addition to being responsible for coal sourcing and
maintaining 39,200 megawatts of existing capacity.
(Business Report, February 5, 2008)

Infrastructure Problems Affect Production

10. (U) Steel maker Highveld Steel & Vanadium warned
that unannounced municipal water supply and
electricity interruptions pose severe challenges to
business. It called for the government to prioritize
capital investment for electricity, water, and rail
infrastructure. In the second half of 2007,
production was negatively affected by random
electricity and water supply interruptions. The group
said load shedding and demand market participation
agreements with Eskom resulted in 35 hours of lost
production, equivalent to about 2,000 tons of finished
rolled steel products. Power Interruptions in January
2008 posed a considerable threat to operations, with
150 hours of lost production, equivalent to about
8,500 tons of lost production. However, the group
posted strong results for the year to December 2007,
with overall demand for steel and vanadium strong.
Net cash generated by operating activities rose 41% to
R1.3 billion ($173 million) after demand and prices
for steel and vanadium rose. (Business Day, February
7, 2008)

Coega Aluminum Project Cast in Doubt

11. (U) Power shortages cast doubts on prospects for
Rio Tinto's Coega aluminum smelter project in Port
Elizabeth. In November 2006, Eskom signed a 25-year
contract to supply 1,350 megawatts of electricity to
the smelter by 2014. Eskom has since announced a
power deficit to continue until at least mid-2012.
Macro analyst Nazmeera Moola criticized the Coega
QMacro analyst Nazmeera Moola criticized the Coega
project since aluminum smelters use 6.5% of Eskom's
total electricity while contributing only 0.1% to
gross domestic product. Rio Tinto Chief Executive of
Energy and Minerals Preston Chiaro said Rio Tinto
would proceed with the Coega project as long as the
government and Eskom provided assurances that there

PRETORIA 00000268 005.2 OF 007

would be power to supply it. If Eskom could no longer
provide power guarantees, then Rio Tinto would have to
look at energy alternatives. Rio Tinto took control
of the Coega project last year through a $38 billion
buyout of Alcan, and has just rejected BHP Billiton's
$150 billion buy out offer. BHP Billiton also
reported that power constraints had prevented the
expansion of its three aluminum smelters in South
Africa and Mozambique. (Financial Mail, February 8,
2008 and Business Report, February 7, 2008)

Power Cuts Put Rand on Rocky Road

12. (U) Analysts expect economic growth in South
Africa to slow from about 5% in 2007 to 3%-4% in 2008,
curbed mainly by the effect of frequent power outages
on production and higher interest rates on consumer
spending. This has added to growing fears of a U.S.
recession, which prompted a risk-averting sale of
local shares and bonds last month and an initial
weakening of the rand. So far this year the volatile
unit has depreciated more than 13% against the dollar
and more than 11% against a trade-weighted basket of
currencies. Traders and analysts said the rand was
now on course to slide to R8.25 or R8.30 against the
dollar, which will add to upward pressure on
inflation, and raise the risk of further interest rate
hikes. One of the main problems for the rand is the
ballooning South African current account deficit, now
at more than 8% of gross domestic product (GDP). With
a global economic slowdown curbing demand for exports
and an official R482 billion ($63 billion)
infrastructure spending plan boosting imports, the
shortfall can only continue to widen. If the
shortfall is not offset by similar amounts of
investment inflows, which in South Africa's case come
mainly from portfolio investments in local shares and
bonds, the rand has to weaken. This will stoke
inflation, which has already breached the upper end of
the 3%-6% official target range for consecutive nine
months, reaching 8.6% in December 2007. JPMorgan
urged investors to trim holdings of South African
shares, citing electricity shortages, political
uncertainty and a potential U.S. recession. "We are
concerned that South African-specific risks have
escalated ... the electricity crisis has shaken our
confidence in South Africa's growth outlook."
(Business Day, February 8, 2008)

Business Confidence Falls to Four-Year Low

13. (U) The South African Chamber of Commerce and
Industry (SACCI) business confidence index (BCI)
dropped from 94.8 points in December 2007 to 93.8
points in January 2008. SACCI said that apart from a
single instance in April, when the BCI jumped to 101.9
Qsingle instance in April, when the BCI jumped to 101.9
points, the index had been in a declining trend
throughout 2007. This is the lowest January level
since 2003, when the BCI stood at 82.8 points, and the
lowest overall level since October 2003, when it stood
at 91.6 points. According to the SACCI, the negative
business sentiment was due to declining international
trade volumes, a weaker rand, rising inflation and a

PRETORIA 00000268 006.2 OF 007

falling stock exchange. However, the negative
sentiment was partially offset by record precious
metal prices, slightly positive data on retail and
vehicle sales and lower real financing costs.
(Business Day, February 6, 2008)

SADC to Boost Air Transport

14. (U) The Southern African Development Community
(SADC) prioritized air transport as a measure for
delivering a quality 2010 FIFA World Cup and the 2009
FIFA Confederations Cup. A joint meeting of SADC,
Common Market for Eastern and Southern Africa (COMESA)
and the East African Community (EAC) Civil Aviation
Directors and industry executives highlighted a need
for interventions and improvements. The officials
identified a shortage of human resources such as
pilots and navigation agencies as challenges in the
Victoria Falls region. The meeting cited the airline
industry's ability to meet ever-increasing demand as
another challenge facing SADC. Delegates stressed the
need to provide efficient, cost effective, and
affordable air transport service, with emphasis on the
introduction of direct city-to-city flights. They
resolved to establish working groups, tasked with
developing and implementing government interventions
such as a fast-track Open Skies Policy.
Representatives of the International Civil Aviation
Organization, Airline Association of Southern Africa,
and the International Air Transport Association were
also present. (Engineering News, February 4, 2008)

Vodacom Offers Free Upgraded Internet

15. (U) Vodacom is driving mobile-data connections
with its latest move to offer a free upgraded high-
speed internet service to existing subscribers for
three months. Vodacom's move follows that of rival
MTN, which announced last week that it would offer
higher-speed data at selected metropolitan locations
at no extra charge. Vodacom said this move would
allow customers to access the fastest mobile broadband
connection and attract new data customers. Customers
who have devices, such as the Vodafone Mobile Connect
USB Modem, will be able to add the new service, a
high-speed downlink packet access (HSDPA) of 3.6
megabits per second, to existing data packages. HSDPA
is a third-generation, mobile-telephony protocol which
offers increased data transfer speeds and capacity.
(Business Report, January 30, 2008)

DEAT Bans Abalone Diving

16. (U) The Department of Environmental Affairs and
Tourism (DEAT) announced new regulations restricting
abalone diving on February 1, 2008. DEAT Minister
Marthinus Van Shalkwyk said the ban is an essential
component of DEAT's strategy to protect abalone in key
Qcomponent of DEAT's strategy to protect abalone in key
areas where the stocks have a potential to recover
from serious depletion. The ban will be imposed in
five areas including Robben, Dyer and Bird Islands, as

PRETORIA 00000268 007.2 OF 007

well as Cape Point and the coastal area between
Gansbaai and Quon Point. The ban was met with strong
objections from local fishermen. South Africa reduced
abalone harvest quotas from 3,000 tons in 1965 to 125
tons in 2007. However, stock depletion continued due
to illegal harvesting. (Business Day, February 4,
2008 and DEAT Media Statement)


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