Making Sense of the Strikes

The current wave of strikes is puzzling many intelligent people.  It is hard to believe that the Trades Unions do not understand the basic economics of supply and demand. 

To assist them in this, it seems necessary to explain that the market will always find an equilibrium.  The market for the product of the mines – gold, platinum, coal, ferrochrome – is broad.  A higher price will act to entice higher-cost mines and producers into the market, increasing the supply and driving the price down.  The mines require capital, which is priced on a similar basis, with the addition of a risk element.  Given a stable world supply of capital, an increased demand for capital will drive the cost of that capital up.  One way to reduce that cost is to provide a more stable – read ‘lower risk’ – to the investor.  The cost of capital is reflected in the long-term earnings of the capital.  If the earnings reduce, the capital leaves to find another more profitable home.  If the level of perceived risk increases, the capital demands a higher reward to compensate for the risk, and if that is not forthcoming, the capital goes elsewhere.  What this all says is simple.  A dramatic increase in the cost of labour will reduce the attractiveness of the investment entity – the company or the country – to capital, and it will lead to the investors seeking a more profitable home.  As a side issue, the cost of electricity, also an significant factor in the operation of a mine or a factory, is a determinant in the profitability of the company, and, given the propensity of Eskom to impose huge cost increases simply because it has been abysmally poor in its own operation, the cost of electricity has become an important factor in the ability of South African companies to attract investment money.  The added higher cost of labour, both in terms of disproportionately high wage increases and in terms of lost production and the costs of restarting operations as a result of illegitimate strikes, has become a significant disincentive to investment in South African companies.

On the other side, if companies are put in the position of cutting costs or closing operations, the only choice available is to cut costs.  They will find any possible way to reduce the cost of labour, and this will certainly translate into reducing the size of the labour force.

However you look at it, the current wave of strikes and exorbitant wage increases can have only one result – a massive loss of jobs in one of the largest job-providing sectors of the country.

The lesson is simple, the principles well-established, and even the most Communistically-inclined Trade Union officials must surely understand the basic principle.

So why are the strikes and the wage demands happening now?

In discussing this matter with some people in Europe, a man who had intensive dealings with the ANC and its various organs in the early years of the ‘Rainbow Nation’, an interesting comment came to light.  During a discussion regarding an investment by the ANC in about 1997, the man asked how the ANC intended to achieve its objective of economic, not just political, dominance of the country, he was informed that “we intend to bring the country to the brink of collapse, and then to buy up the interesting companies for almost nothing, before we start the revival process!”  The man commented that he had not believed that the comment was made in earnest, but rather as an excess of alcohol speaking out.  However, the recent events in the country certainly caused the man to reassess the comment.  The Stock Exchange has reacted precisely as one would expect.  The prices of all mining companies has fallen, some dramatically, and the signs are that they will continue to fall, with the loss of production as a result of the strikes having a significant effect in addition to the higher wage and electricity costs.

The question now arises:  who is driving the train?

The drivers of the strikes include Cosatu, a member of the ruling Tri-Partite Alliance, the ANC and the ANC surrogate, Julius Malema.  The ultimate driver of the Eskom price rises is the ANC.  The driver of most of the recent or imminent cost increases for businesses in South Africa is the ANC.

Can it be that the statement mentioned above, at first glance so improbable, contains more than a grain of truth?  Is it possible that the ANC and its fellow travellers have come to realise that a distinct possibility exists that they will no longer be the driver after the next election, that they have therefore decided to implement Plan B?  It seems hard to believe, and I would certainly not make the allegation, but it certainly gives food for thought!

We won’t know until we are able to look at the Share Registers of the companies that are now being affected by the current wave of apparent lunacy, and then it will be too late.

South Africans will do well to remember that the price of liberty is eternal vigilance.