How the Collapsing Rand Should Influence Your Approach to Resource Efficiency

While the recent sharp decline in the Rand is expected to introduce significant local economic shockwaves, the reality is that the currency has been depreciating steadily over a long period of time. What are the implications for your resource efficiency strategy and how should you respond? In simple language: “with extreme urgency”.

Rand weakness is a function of structural deficiencies in the South African economy, the vagaries of the commodity cycle and perceived risks for investors. Manufacturing in South Africa is in long-term decline, with all sectors coming under relentless pressure from cheaper imports and some (such as textiles, and more recently, steel) having to undergo fundamental restructuring just to remain viable . Our inability to compete (for various reasons, not simply the high cost of labour, as many would purport) reduces demand for our products, leading to reduced exports and increased imports. China’s voracious appetite for our resources has slowed, albeit some feel only temporarily. As an economy with a long history of low beneficiation levels, this hurts the currency. Local and international investors are concerned about our ability to competently exercise fiscal restraint and take appropriate action in the face of growing demands for funding by poorly performing SOE’s, and there are also broader concerns regarding national governance. This leads to portfolio outflows as positions in our capital markets are closed and are taken up in more stable and attractive environments.  These and other factors are combining to drop the value of our local currency.

The economic implications of a falling rand are dire at the macro level, and have some direct impacts on the urgency with which you should approach resource efficiency projects as well as the context within which these projects will now be implemented. In broad economic terms, a weaker rand translates into increased levels of inflation, since South Africa is a net importer of goods and services. Interest rates tend to increase in response, both to support the currency as well as to contain inflation. With the exception of exporters, demand levels tend to fall, and in most manufacturing plants, this naturally translates into increased resource intensity.

A falling Rand can also feed into increased local resource prices, particularly given that the resource sector tends to be capital intensive and that much capital equipment is still imported. The enormous capital investment programme currently underway in the power sector will become more expensive, requiring higher electricity prices in order for these investments to be recouped. This “low product demand /  high input cost” scenario is the stuff of nightmares for manufacturers.

Resource efficiency offers organisations what I personally believe to be the most powerful way to reduce costs. Unlike fixed cost reduction, increased levels of resource efficiency have a multiplier effect, with benefits increasing as levels of production increase. Resource efficiency can be achieved by changing operating procedures, optimisation of existing facilities, small plant and process modifications and through capital investments.

“Low-cost/no-cost” opportunities are the holy grail of resource efficiency. As a simple example, earlier this year we were able to save one of our clients an estimated R360,000/annum in energy and demand charges by simply making changes to pressure settings on a compressor. More often than not, we make significant gains in boiler efficiency by optimising excess air levels, which is often achievable by simply changing the position of a damper valve. If I put it to you that finding and fixing air, steam, water and product leaks is important, your response would be that this is self-evident. These types of opportunities make sense in any economic environment, but even more so in the current one. Finding such “low hanging fruit” should be your top priority right now.

Investment projects in the area of resource efficiency become more expensive to implement against the backdrop of a falling Rand, given that equipment prices and financing costs both tend to increase with currency weakness. Increased resource prices will however help to make these investments more financially viable. The paybacks for well-conceived resource efficiency projects are in my experience very good, particularly where materials, waste management and energy are concerned. My personal views are that one should take a portfolio approach, bundling optimisation and capital projects, in which case it is not uncommon to arrive at overall paybacks of 1 – 2 years for a typical industrial site.

In summary, a weaker Rand is expected to dampen demand, reducing the capacity of manufacturers to pass price increases onto consumers. Cost reduction is absolutely imperative in this economic environment, particularly so-called “low-cost/no-cost” initiatives. Where capital investment is needed to realise resource savings, this is expected to cost more as the Rand weakens, but the cost of doing nothing will be even higher as margins are squeezed due to rising input costs. All avenues of achieving increased levels of resource efficiency should therefore be explored as a matter of urgency, including those perceived to be capital-intensive.

Manufacturers that do not develop and implement a cogent plant of action with regards to resource efficiency in the current economic climate are unlikely to remain competitive. Start working on this like your life depends on it.

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