(Reuters) – The sliding rand is a double-edged sword for mining companies in South Africa, with cost inflation, wage claims and potential labour unrest outweighing the gains that exporters traditionally derive from domestic currency weakness.
The drop in the rand , near 13-year lows against the dollar, should benefit diversified mining giants such as Anglo American, BHP Billiton and Glencore as well as domestic companies such as gold producers Gold Fields and Anglo Gold Ashanti.
The rand has lost 7 percent so far in 2015 against the dollar, which has risen against emerging market currencies across the board on expectations of U.S. rate hikes. The flip side of this is that the rand gold price has increased over 4 percent this year even as the spot gold price in dollars has fallen 2.5 percent over the same period.
That’s good news for mining companies in the country who benefit from mostly cheaper costs but higher income from sales of their commodities.
However, those gains may evaporate in the face of inflationary pressures which are poised to lift costs longer term and will strengthen the resolve of the South African labour force – no strangers to strikes – to obtain bigger pay rises.
South Africa’s National Union of Mineworkers (NUM) said on Thursday it may push for wage hikes of as much as 100 percent for its lowest paid members in forthcoming wage talks in the gold, coal and diamond sectors.
“A weaker rand will help the margins in the short-term but you will have inflationary pressure on the ground,” said Markus Bachmann, Johannesburg-based fund manager for Craton Capital.
Headline inflation slowed to 4.4 percent in January from 5.3 percent in December, but that trend may reverse given that the rand’s fall this year coincides with a scorching drought that threatens production of the staple maize crop.
The most-traded July contract is up about 25 percent in 2015, which will drive up food prices, creating a perfect inflationary storm just as gold miners’ wage talks loom.
South African miners on average have eight dependants, so their disposable income is closely tied to food costs.
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