One of the big questions the budget will have to answer on February 23 is how the Treasury sees the outlook for commodity prices, and what this means for government revenue and the fiscal framework.
The context is one in which the tax take now looks to come in significantly higher than the Treasury projected even in November, and the deficit and debt numbers will look better too. While most tax types have outperformed, it is corporate income tax that has shot out the lights — mostly because of a commodity price boom that has ramped up mining company profits.
The latest monthly numbers from the Treasury showed the corporate tax bonanza continued to be unexpectedly strong, despite a softening in commodity prices in the second half of 2021. Economists are busy revising up their numbers, and we will know more as the large listed mining companies start reporting their December year-end financial results in coming weeks.
But what is clear is that finance minister Enoch Godongwana was too conservative when he estimated in November’s medium-term budget that revenue for the current fiscal year would come in R120bn higher than the Treasury projected in last February’s main budget. The number is likely to be closer to R200bn, or even higher, taking total revenue for the year to well over R1.7-trillion
The prospect of that big extra revenue pot can only have upped the pressure on the-government to spend — on some form of basic income grant (BIG) in particular. The Treasury will push back and emphasise the dangers of deploying a temporary commodity boom revenue windfall to fund permanent increases in spending on a BIG. The big question is how temporary is temporary. Which is why what Godongwana has to say about the cycle will be so closely watched.
Commodity markets are cyclical for classic supply and demand, what-goes-up-must-come-down reasons — demand jumps when supply is short, driving up prices, but eventually the high prices attract investment in new mines to meet the demand, and/or prompt buyers to cut their demand or switch to substitutes, and prices decline. There are macro factors that drive all prices — hence current global concerns about slowing growth in China and monetary tightening in the US, and what that might do to demand for commodities.
However, each commodity also has its own specific market dynamics and drivers — and SA has its own specific basket of export commodities, dominated by platinum group metals, coal, iron ore and gold. The picture has been a volatile one, with 2021’s second-half slide followed by a pickup in the past two or three months in the prices of some of SA’s key exports. All of which makes calling the cycle and its likely influence on SA’s tax take in coming years a tough one.
The latest figures show corporate income tax collections were up 74% for the first nine months of the current fiscal year, which runs to the end of March, compared to the November medium-term budget’s 43% estimate and to a 31% increase in tax collections overall. Mining company profitability will have contributed a big part of that, aided by a couple of extra, temporary boosters. One is that mining companies don’t just pay income tax on their profits but also royalties, which are linked to their revenues — but the formula for the royalty rate is such that the higher their profits, the higher the royalty rate.
This year’s royalties will be a pretty substantial sum.
Second, mining companies haven’t been investing for some years now, so they won’t have been deducting big charges for depreciation from their taxable profits and will be paying more tax than if they had been investing. That doesn’t mean the lack of investment — a global trend — should be welcomed. PwC has calculated that each rand of tax government gains on the depreciation not charged when miners do not invest is countered by the R1.33 government gains when miners do invest, because of the extra profits that accrue to their suppliers, construction companies and others.
While the current boom is a lot to do with the fact that post-pandemic demand for commodities has soared in a context in which years of underinvestment has limited supply, for SA if its miners can’t invest now they won’t be positioned to take full advantage of favourable markets in future.
With global growth slowing, the concern is those markets may not be favourable for that long. But there’s quite a bit of bullishness about when it comes to some of SA’s most important commodity exports. Just transition or not, coal is coining it for SA right now. Supply is short and will remain so because no-one is investing in new coal, while demand is expected to hold up over the next decade, even if not beyond that. The recent run-up in natural gas prices also fed through to coal.
Analysts at Afriforesight estimate coal companies’ operating margins hit 50% and will stay around 30% in 2022, with prices still strong even if they are well off their record highs of 2021. Platinum group metals are expected to stay strong for a good while too as the world goes greener, though SA’s platinum miners are starting to invest and new supply will be coming onto the market. The dynamics have been quite favourable in other key commodities such as iron ore and manganese too, and could remain so this year and next.
Few are looking to more than another couple of years of boom times though. Even if prices hold, input costs such as fuel are going up, so profitability and therefore taxability won’t stay at record levels. The tragedy is that SA, and the tax take, could have done even better out of the current boom if the mines could have relied on a stable electricity supply, or a reliable rail service, not to mention a stable supply of water.
All of this makes it likely that the Treasury might err on the conservative side in its forecasts yet again. It suggests too that those calling for urgent BIG spending increases might do well to call for more urgency on fixing the structural constraints to more exports, more growth and more revenue.
• Joffe is editor at large.
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