Business consultancy Partners in Performance South Africa says that the South African industry should be cutting costs in response to the current market turmoil.

The company says that cost cutting should not be carried out through super- ficial economy drives, but by fundamentally rethinking the factors that really drive the cost base.

Partners in Performance lead principal Simon Davies comments that anyone who thinks that the South African industry is immune from the effects of stock market and financial sector turmoil around the world is mistaken.

He notes that even though astute government regulation effectively saved the South African banking sector from the ravages seen in the US and the UK, the fact remains that the country’s economy is largely driven by export industries, such as mining and tourism, and the prosperity of these industries is subject to what happens in offshore markets, rather than conditions in South Africa.

“In the South African mining sector, the economic effect is not necessarily obvious to the man in the street, but plummeting consumer confidence in Europe, the US and Asia is already driving down demand for new housing and new cars in those regions. This, in turn, reduces demand for building materials and automotive components made from steel. European and Japanese steel mills are hurting, and some have temporarily halted production altogether. Many of these mills get their raw materials from South Africa,” says Davies.

On the back of that, South African sup- pliers to the Asian and European steel industries have been hit by falling prices and dropping volumes, resulting in production cutbacks in the local steel-related industries like iron-ore, manganese and chrome.

In turn, these cutbacks have ‘trickle-through’ effects on the regional economies surrounding the affected industries.

“We are already experiencing signifi- cant cost reduction programmes from mining sector clients in the US and Australia,” says Davies. He adds that one has to con- sider the fact that South Africa has to compete with these countries. If they are cutting costs, South Africa has to follow to stay competitive.

Davies reports that not all sectors of the South African mining industry have been hit as hard as the suppliers to the global steel industry. “Export coal volumes are still holding up but prices are declining, which means that South Africa’s coal producers are probably going to feel a profit pinch at some point in the future,” he says.

The same goes for the platinum industry, where dwindling demand in the automotive industry has had a serious effect on platinum mines in South Africa.

Davies says that the only answer for commo- dity producers is to cut costs. “I am not referring to superficial economy drives like making sure the office lights get turned out at night, or buying a cheaper brand of coffee”, he comments.

Davies adds that when one no longer has the benefit of high prices or high pro- duction volumes to keep unit costs down, companies have to fundamentally rethink the things that really drive their cost base, such as productivity, contractors, suppliers, overheads and overtime, and the way one manages these aspects.

“Unfortunately, this is easier said than done. Most companies get complacent about productivity drivers and cost discipline when times are good, and lose the ability to manage these aspects tightly when times get tough.”

Davies comments that there is no point issuing a sudden cut in the overtime budget if the foremen controlling this do not know how to manage the factors influencing overtime in the first place, such as poor roster planning, inadequate shift licence coverage, frequent equipment breakdowns, or laxity on absenteeism.

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