Bloomberg News

Worst Currency Lifts South African Exporters as Growth Slows

January 03, 2012

(Updates exchange rate in second paragraph.)

Dec. 29 (Bloomberg) -- The world’s biggest major-currency decline is benefiting South Africa’s largest companies as export earnings in dollars rise and commodity producers from AngloGold Ashanti Ltd. to Sasol Ltd. beat peers in the stock market.

The rand has fallen 19 percent this year to trade at 8.30 per dollar, the biggest slump among the 12 most-traded currencies tracked by Bloomberg, as Europe’s sovereign debt crisis led to a selloff in riskier assets. It may retreat 3.7 percent to 8.50 per dollar by the end of the first quarter, according to the median estimate of 25 analysts surveyed by Bloomberg.

South Africa’s Reserve Bank let the rand sink 15 percent against the dollar in the past four months after the currency’s advance to a four-year high in April led Trade & Industry Minister Rob Davies to say it was “overvalued’ and ‘‘debilitating’’ for manufacturers. Gold producer AngloGold Ashanti gained 8.3 percent since Sept. 1 as the rand’s drop increased the local-currency value of gold. Sasol shares rose to a 40 percent premium to the FTSE 350 Oil & Gas Producers index.

‘‘It’s been very beneficial for these types of companies, like Sasol, where the rand oil price is the big driver,” Greg Katzenellenbogen, a director of Sanlam Private Investments in Johannesburg, which manages $7.5 billion, said in a Dec. 14 phone interview. “For shareholders, certainly from an earnings point of view, it can lessen the pain that a weaker currency brings in other aspects of life, such as higher inflation.”

Rand Decline

The South African rand is the world’s third-worst performing currency this year, after taking into account price swings, ahead of only the Argentine peso and Indian rupee, data compiled by Bloomberg show. Non-deliverable forward contracts, which provide a guide to investors’ expectations of currency and interest rate moves, show the rand extending its decline to 8.56 per dollar in 2012. The rand traded at 8.15 per dollar as of 9:54 a.m. in Johannesburg.

Sasol, the largest South African company by revenue and provider of 40 percent of the nation’s motor fuel, posted net income of 19.8 billion rand ($2.4 billion) in the fiscal year ended June 30, up from 15.9 billion rand the year before. Earnings in the six months through December may rise by at least 45 percent from a year ago, the Johannesburg-based company said in a Nov. 30 stock exchange statement, adding that it is “well- positioned” to increase profit in fiscal 2012 as the weaker rand compensates for slowing global growth. The rand’s decline “positively impacted” revenue in all the company’s divisions, Chief Financial Officer Christine Ramon said in the statement.

Operating Profits

Annual operating profits rise 946 million rand ($118 million) for every 10 cents the rand loses, Sasol said. Sasol shares have climbed 13 percent to 383.32 rand since the beginning of September.

“The majority of our turnover is denominated in dollars or significantly influenced by the rand-dollar exchange rate,” Jacqui O’Sullivan, a spokeswoman for the company, said in an e- mailed response to questions from Bloomberg. “Therefore, the average exchange rate for the year has a significant effect on our operating profit.”

Sasol takes out forward-currency contracts to protect against swings in the rand, O’Sullivan said. All major capital expenditure in foreign currency is hedged through forward contracts immediately after approval of a project, while import costs in excess of $50,000 are also hedged, she said. A forward contract is an agreement to buy or sell a currency at an agreed price at a specified future date.

Aluminum Exporters

“This policy enables us to more accurately forecast our cash outflows for purchases of both capital items and operating materials,” she said.

For Hulamin Ltd., Africa’s largest maker of fabricated aluminum products, every one-rand weakening in the dollar-rand exchange rate over a full year adds as much as 200 million rand to profits, according to Chief Financial Officer Charles Hughes. More than 60 percent of the Pietermaritzburg-based company’s sales revenue is earned outside of South Africa. The stock has climbed 13 percent since the beginning of September.

“The average exchange rate for 2011 is still going to be at the stronger end of the scale rather than weaker, but the weakening of the rand in the last quarter will benefit our results for sure” Hughes said in a Dec. 21 phone interview from Pietermaritzburg. “For 2012, if it remains above 8 rand, it will have a significant effect on our profits.”

Gold Mines Index

AngloGold Ashanti, the largest African gold producer, said in November that the falling rand helped drive third-quarter profit excluding one-time items to a record $457 million, or $1.18 a share, from $342 million, or 89 cents, in the prior quarter. AngloGold shares rose 1.5 percent this quarter to 344.03 rand. Its gain since September came as the FTSE Gold Mines Index slid 15 percent.

While exporters and companies dependent on substantial foreign earnings are benefiting from the rand’s decline, those more reliant on imports or domestic sales are seeing profits fall after the weaker rand pushed costs higher. South Africa’s annual inflation rate rose to 6.1 percent in November, breaching the central bank’s target range for the first time in almost two years.

“Domestic companies like retailers will be the worst off,” Rhynhardt Roodt, an analyst at Investec Asset Management in Cape Town, said in a phone interview on Dec. 15. “If you have the view the rand will weaken, you’ll import a lot more inflation. Companies with large foreign shareholdings will also be exposed as foreign investors sell their shares.”

Raw Materials Inventories

Adcock Ingram Holdings Ltd., Africa’s largest over-the- counter drug company, reported a 19 percent rise in profit to 754.3 million rand for the 12 months through September, benefiting from a strong rand, which averaged 6.98 per dollar for the period, cutting the price of imported raw materials. Those costs are set to rise as the rand declines, Chief Executive Officer Jonathan Louw said in a statement on Nov. 22.

The company increased its raw materials inventories while the rand was strong, and is now buying forward exchange rate contracts to help protect against further declines. The company’s shares have dropped 4 percent since June 7, when they reached a six-month high.

Finance Minister Pravin Gordhan in October trimmed his forecast for growth in Africa’s biggest economy this year to 3.1 percent from 3.4 percent, and lowered next year’s estimate to 3.4 percent from 4.1 percent. South Africa’s economy expanded an annualized 1.4 percent in the third quarter as manufacturing and mining output slumped.

Deficit Widens

The current account deficit widened to an 18-month high in the third quarter as the cost of imports rose faster than the value of exports, the central bank said Dec. 8. Manufacturing growth eased to 1 percent in October from 8.1 percent the month before, according to Pretoria-based Statistics South Africa, missing the 5.7 percent median estimate in a Bloomberg survey of 12 economists.

The worsening debt crisis in Europe, which buys 30 percent of South Africa’s manufactured goods, has also sapped demand for exports. That may persuade the Reserve Bank, led by Governor Gill Marcus, to keep its benchmark interest rate unchanged at a 30-year low of 5.5 percent until the end of the second quarter, according to nine out of 10 economists in a Bloomberg survey.

The three-month implied volatility of the rand versus the dollar climbed to 22 percent this week, from 21.9 percent last week, indicating traders of currency options see the currency’s swings widening in coming months.

Weak Currency

While the weaker rand can result in a “short-term buffer” for the economy, in the longer term it’s not a substitute for competitiveness, Razia Khan, an economist at Standard Chartered Plc in London, said in a phone interview on Nov. 30.

“There is no evidence to suggest that a weak currency on its own is going to drive lasting real economic gains for South Africa,” Khan said. “If the rand weakens because people are concerned about global growth then it’s going to be difficult for South Africa to grow market share anyway. So a weak currency is really not the answer. The context in which it happens is more important.”

--Editors: Ash Kumar, Linda Shen

To contact the reporter on this story: Robert Brand in Cape Town at rbrand9@bloomberg.net Stephen Gunnion in Johannesburg at sgunnion@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net


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