THE current economic situation, which manifests itself in the liquidity crisis and company closures, is rooted in the incoherency of ZimAsset and the national budget. These two documents, which are supposed to drive our economic growth, overlook the fundamental cogs of industrialisation and investment in labour productive sectors as the keys to drive our economic growth.
My suggestion to government would be to draft a separate industrialisation policy paper altogether. This policy paper should be deeply rooted in the soil of Zimbabwe, and take cognisance of our surrounding environment. It should not respond to the dictates of the so-called market price mechanism. The allocation of resources should be in response to the imperative of maximising labour productivity and resources, and should be directed in concentration to industrial sectors where “labour productivity rises fast”.
As I stated in previous articles, the most profitable sector is Pharmaceuticals & Biotechnology, followed by Banking; Diversified Financial Services; Software & Services; Telecomms; Food and Beverage; Oil & Gas; Heavy Machinery; Mining and then other sectors (Note – Tobacco farming and agriculture, in general, are near the bottom of the list in terms of labour productivity).
The sectors mentioned above maximise income-per-capita, contribute more to GDP and will bring about lightning economic growth and development. For example, if investing in Pharmaceuticals is going to contribute 50% to the GDP and agriculture will contribute 15% annually, would it be rational to pour funds into agriculture at the expense of pharmaceuticals just because the market price mechanism says pour funds into agriculture?
It is imperative that government prioritises a survey and detailed analysis of our manufacturing and industrial sector (company by company) prior to drafting an industrial policy paper. This survey should also analyse the labour sector to determine the skills set and demographic profile of the 80-90% formally unemployed. We need a database of companies operating in Zimbabwe as the information provided on the Zimstat website is not detailed enough; it only provides manufacturing volumes at best.
The questions that government should be asking are: “What are local manufacturer’s products or brands by sector? What are they producing for local consumption? What are they exporting – in what volumes and at what cost? What raw materials are they importing and at what cost? What are their business models and are they overpaying management? Should certain products be subsidised at point of sale? What is the cost of labour, compared to the region? How can erratic power and water supply be mitigated? Are our taxes, rentals and the cost of borrowing the main problems? Are we overpricing our products in US$? What export incentives and tax breaks can government implement to stimulate exports?Advertisement
We also need to research which export incentives are in other countries that are making their products more competitive than ours. Is it their currency, their labour costs, their tax laws and incentives, their electricity tariff rates, their average rentals for commercial spaces or their overhead costs? We need to carry out exhaustive research and understand the problem first before trying to prescribe a solution.
Not agriculture or mining
The government is still oblivious to the fact that agriculture and mining are not going to grow the economy significantly. Those who believe that our resources alone will spur our economic recovery are deeply misguided. If we’re lucky, the economy is going to limp along recording modest growth rates of 2 to 3% year-on-year on the back of tobacco and mining, whilst we deindustrialise at an alarming pace to our own detriment.
The end result will be the decimation of what’s left of the formal sector and the downward spiral to yet another inevitable economic collapse. The current informal small to medium enterprises (SMEs) which have arisen from our economic collapse are no cause for celebration. These were born from survival instincts and not necessarily from innovative entrepreneurship. The majority of these SME’s in the informal sector do not fall under the more labour productive sectors, and should not be expected to spur economic growth.
All is not doom and gloom however. Zimbabwe is coming off a low economic base, so anything less than double digit growth will not generate much-needed jobs. The government needs to be bold and revolutionise our own trajectory by adapting binary economics for broad-based wealth redistribution and accompanying double digit growth. I would recommend the following link which provides a better explanation of binary economics: http://www.cesj.org/binaryeconomics/be-inanutshell.htm. And for those economists out there, I would recommend these two links for further reading:
Developed (industrialised) countries, with no natural resources of their own, will continue to widen the wealth gap compared to underdeveloped countries like ours. We are inadvertently fuelling our own demise and helping increase this gap even further by continuing to sell our natural resources in their raw form, instead of converting these to final products. Please note that refining or smelting ores and then exporting them, under the “Beneficiation” theme, is not the solution either. We need to maximise value addition up to the final product. I’m going to try to provide the reader with a simple detailed example of the value addition chain in steel manufacturing. It is self-evident that we are perpetuating our own poverty and deindustrialisation.
For example’s sake, let’s say iron ore extracted from Buchwa mine is to be used by NewZim Steel (once their plant is up and running). The current market price of iron ore is $125 per tonne. To extract 1 tonne of pig iron you need 2 tons of iron ore, which will cost $125 per t x 2t = $250. Additionally, steel can be produced from this pig iron by removing impurities from the molten iron. The molten steel will then be cast in different forms, namely slabs which are rolled into flat products – blooms – which are shaped into girders, beams and other structural shapes; and finally billets which are formed into bars and rods.
The current price of steel billet/bloom on the London Market Exchange is $535 per tonne. So the value addition of this process by NewZim Steel will be $535 – $250 = $285, or approximately 114% of value addition based on current market prices. If NewZim Steel (Ziscosteel) has a production capacity of 1 million tonnes of steel per year, then they should be able to generate $535 million per year easily; of course once fully operational. If they plan to expand capacity to 2 million tonnes, this will translate to over $1 billion in steel exports. But before we get ahead of ourselves, this is not where the value addition chain ends, as the steel can be fabricated into other items to increase its value even further.
I’m not sure how Essar were chosen to take over Ziscosteel or how the deal was structured. However, if they were awarded the rights to the Buchwa mine as part of the deal, then this indeed was one of the biggest blunders ever. The iron ore should be purchased from the mine at fair market prices. Essar would still be able to recoup the $750 million they invested in less than 3 years with this set-up. If they get the iron ore for free, then they’ll get their investment back in a year and a half, and the rest is pure profit. If it was up to me I would have chosen ArcelorMittal, strictly from a strategic point of view in that they would have opened up our steel sector to a wider global market.
Going back to the issue of the value addition chain, if you convert the steel blooms to structural beams, which cost $560 per tonne, then you only get about $25 of value addition per tonne. So for me this part is not the key to maximising value addition. There are two clear options to exponentially add value to the steel billets/blooms.If you recall in one of my previous article I highlighted the possibility of setting up a stainless steel plant in Zimbabwe. I was quite surprised when a few weeks later a Chinese company was proposing exactly the same thing in our local press.
Stainless steel (and Chrome-Moly steel) is where the money is! It is self-evident that an opportunity exists in partnering with a reputable global steel company to build a stainless steel plant in Zimbabwe to make slabs, billets and blooms, and then also go on to also fabricate plate, tubes and fittings. I would not choose a Chinese company for this partnership if the aim is to have an extensive global reach in export markets. At this moment in time, only a handful of reputable Chinese companies fetch the market price for their stainless steel products due to the issue of quality assurance.
Take the current price of stainless steel coils (SS304 for example) at $2350 per tonne, which is four times the $535 per tonne for normal carbon steel. Incoloys and higher grade duplex stainless steels are even more valuable. The basic elements required for stainless steel production are readily mined, smelted and available in Zimbabwe, i.e chrome, nickel, molybdenum, silicon, sulphur, phosphorous, manganese and carbon. This begs the question: “Why are we exporting all our chrome when, in fact, 85% of global production is used in stainless steel production and chrome plating?”
We have 13% of world’s proven chromite resources, second behind South Africa that has 72.7%, so why are we only mining at 2% output production? Most of the chrome claims are located in Mutorashanga, Chegutu, Kadoma, Kwekwe and Lalapanzi i.e running along the Great Dyke. Zimasco is located in Kwekwe and so is NewZim Steel (Redcliffe in Kwekwe district), so why has it never occurred to anyone to build a stainless steel plant in Kwekwe? From a purely logistical point of view, common sense would dictate that this would be the most suitable location. The other critical element in stainless steel production is nickel, which of course is mined in Bindura, which again is not that far from Kwekwe.
Even the silicon also required can come from silica mined in nearby Kadoma. The government should source lines of credit to build such a plant as this would be much more profitable than even NewZim Steel. The government should build, operate and own such an economically strategic plant. Please don’t let the Chinese beat you to this as well. Having a stainless steel plant would also hedge against the effects of fluctuating commodity prices as the chrome and nickel production can be diverted to the stainless steel plant when Cr-Ni commodity prices are low on the global market.
With the construction of a stainless steel plant, smaller SME’s can then be set up which would use some of the stainless steel in further value addition industries. To say there are endless applications for stainless steel would be an under-statement. To name just a few applications which could easily be export orientated – tubes, fittings, cutlery, cookware, household hardware, surgical instruments, major appliances, industrial equipment etc. SME’s set up to manufacture these stainless steel goods would inevitably be key export earners with the right capital investment.
An opportunity also exists in setting up steel fabrication workshops which would utilise steel profiles, plates and beams from NewZim Steel to fabricate the structural parts in refinery, petrochemical and other process plants e.g pressure vessels, tanks, drums, columns, process heaters, structural frames, pipe racks etc. Structural steel fabricators are currently charging as low as $2.50 to $3.00 per kg to fabricate such steel structures. So for example if you need about 1 tonne of beams to fabricate a simple structural steel frame, you would purchase 1 tonne x $560 = $560 of steel. Now if you charge $2.50 per kg to fabricate this structural steel frame, this means that you would get $2.50 x 1000 kg = $2500 for a fabricated structure. Please note that this is a simplified example, as obviously depending on the equipment, the steel structures would weigh a lot more. A few good welders are all you would need in a fabrication workshop, of course along with the machinery for rolling, bending, cutting, lifting, welding etc, but this is not capital intensive.
You see this is the beauty of value addition from raw material right through to the final product; the initial $250 or iron ore ends up as $2,500 per tonne of fabricated steel structure, or a tenfold increase. This can be increased further by branching into stainless steel production and its related downstream industries. And the same applies across the board to most industries. Obviously each step in the value addition requires the necessary facilities, furnaces, machinery, processing equipment and labour, so although this would entail an initial capital investment, this would generate much needed jobs in the more labour productive sectors, and would obviously increase the revenue base and exports.
The government appears to have reached an agreement with platinum miners to use existing refineries to smelt platinum, however I would implore them again to take this a step further, moving up the value addition chain and insisting on a platinum industrial hub being constructed here in Zimbabwe. The platinum should only leave our country in the form auto-catalyst assemblies, hard discs, electronic components, sensors, platinum-based drugs, fuel cell components and jewellery.
Mining profits very low
Africa as a whole has been deliberately misled to believe that having natural resources is the be-all and end-all. What most of us don’t understand is that the profit margins on mining for example, are extremely low. These margins increase as you go up the value chain, so we should not limit ourselves to smelting and refining of certain ores. Zimbabwe, in particular, and Africa as a whole, will continue to be stuck on the lower end of the value addition chain as I highlighted above, i.e. on the lower scale of $250 per tonne if we do not deliberately invest in industrialisation and the labour productive sectors. Our main objective should be to reach the upper end of the scale on the value addition chain of $2500 per tonne.
Our biggest problem is that we naively expect industrialised countries to invest in our industrialisation at their expense. This is never going to happen. You will always find ready investors for mining, under the same country risk factors, political risk factors, other risk factors, ease of doing business index, corruption index etc, yet you will not find a single investor to set up a manufacturing plant under these same conditions. South Africa is the exception, mainly because of their isolation from the world during the Apartheid regime; they managed to build up their industries over the years with capital earned from selling their natural resources. But, of course, as we all know, the capital there is still held by a few.
Industrialisation for Zimbabwe is not going to come over night, and a good starting point would be to simply assess our imports and exports. The government has correctly identified the trade imbalance as the main problem of our economy and the liquidity crisis, i.e. we are importing too much and exporting too little. Unfortunately the government has not grasped the importance of statistics as a basic tool for formulating economic policies. We have a statistics office in the form of Zimstat, yet we use these statistics to see what products we can raise duty on with the aim of protecting our local manufacturers, instead of using the data to see where we can start new industries. The Zimstats website details the statistics of our imports and exports (see link: http://www.zimstat.co.zw/dmdocuments/Trade/Imports.pdf and http://www.zimstat.co.zw/dmdocuments/Trade/Exports.pdf).
Let’s try to use these two sets of data to analyse why we are importing so much and exporting so little. As mentioned previously the most profitable sector is Pharmaceuticals & Biotechnology, followed by Banking, Diversified Financial Services, Software & Services, Telecomms, Food and Beverage, Oil & Gas, Heavy Machinery, Mining and then other sectors. To highlight the problem we have, and keeping with the same theme of the steel sector, a simple look at a sample of our imports of steel products highlights the problem:
Industrial Steel Products Imports Summary Estimate
Flat/hot-rolled iron-steel: $2 million to $3 million per month.
Galvanised zinc coated steel coils: $1 million to $2.3 million per month
Flat cold-rolled iron/steel: $2 million to $3 million per month
Sections and profiles (L,T,U,I): $1 million to $2 million.
Wire, Stranded wire, barbed wire, chains: $2 million to $4 million per month.
Tubes & Pipes: $300,000 to $1 million.
Screws and bolts: $1 million to $1.5 million per month.
Structures and parts of structures: $1 million to $5 million per month.
Tankers and tanker trailers: $200,000 to $2 million per month.
Machinery and tools for mining
Rock drilling or earth drilling tools: $400,000 to $1 million per month
Interchangeable tools for tapping, threading, boring, knives, blades: $500,000 to $1 million per month.
Machinery and tools for farming
Machinery for preparing or making tobacco: $20,000 to $1.5 million per month.
Seeders, Planters & Transplanters: $100,000 to $250,000 per month.
Cultivation machinery: $100,000 to $500,000 per month.
Whilst Zimplow is engaged in manufacturing basic farm equipment such as ploughs, harrows, planters, cultivators, hoes and shovels, there is potential here to setting up SME companies to manufacture more complicated agricultural equipment, which will improve the mechanisation and industrialisation of the agricultural sector.
(Fridges, Freezers, Washing Machines, Parts of refrigerators): $1 million to $2 million per month. A special note here in that these white goods in particular are relatively easy to manufacture, and are not as capital intensive as heavy machinery industries. There is great potential in setting up SME’s to manufacture more of these items locally.
From the sample above it’s also self-evident that there is potential for more SME’s start-up companies to venture into wire manufacturing, screws/bolts manufacturing, saw blade manufacturing, structural steel fabrication and white goods manufacturing – all geared to import substitution industrialisation with the end objective of expanding operations for export markets. These are all items which can and should be manufactured in Zimbabwe.
Some might have a fancy name from what I’m proposing above, but I call it “common sense”. The government also needs to prioritise the start-up and operationalization of NewZim Steel. When this comes into operation, it should be able to cover the imports of bars, billets, and sections described above and help increase the number of SME’s in the sections I’ve highlighted above.
You don’t need an MBA to start up your own business (or SME). I’ve found that the basic tools required for any successful business start-up are Google, a business proposal and a detailed financial analysis. I would recommend the following links to budding entrepreneurs which are reasonably detailed and at the same time simple to use:
Business proposal template:
Detailed Financial Analysis
For those looking to start-up businesses with the end purpose of regional exports, then a good source for export markets data is the following link which has useful statistical information on SADC:
As I’ve stated in previous articles, the secret of success in any human endeavour lies in “the art of bringing the greatest physical force to bear on a single point”, or more correctly, on the strategically most important single point. As capital is strategically the “greatest physical force”, this needs to be brought to bear on investments which fall under the labour productive sectors.
But having a brilliant business proposal will not guarantee start-up capital. Zimbabwe’s (and Africa’s) biggest problem is access to capital, i.e. you need money to make money. Through certain historical injustices, capital has been accumulated by other countries at our expense, and is now in the hands of a few. I’ve been called a “bush academic” by fellow Zimbabweans for suggesting that Zimbabwe and Africa should be compensated for colonialism and slavery. I don’t expect everyone to see the angle I’m coming from as we were all educated to different levels, and in different ways, and each person has their own different view on the dynamics of the global economy.
Zimbabwe is perfectly suited to industrialisation, leaning specifically towards steel production and heavy machinery. We have the basic raw materials which are strategically located within proximity of each other, we have the human capital and necessary skills set, and better still, as a country we are the geographical hub of SADC. The only thing we don’t have is access to capital. If the national budget had allocated at least $1 billion to recapitalise the Industrial Development Corporation (IDC), to provide no-interest loans to indigenous Zimbabweans setting up SME’s in the labour productive and industrial sectors, we would be singing a different tune today. This “small” investment could have been used as the basis for creating a strong indigenous industrial based private sector.
SME’s should also have incentives like 2 year tax breaks; this will help bring the informal sector into the formal sector. The finance minister stated a few weeks ago that he will not be any making job cuts to the civil service. The structural problems of the parastatals was reported back in 2010 by the World Bank, so there is no need to carry out further research as most of the recommendations still hold true today and just need to be implemented, see link: (http://documents.worldbank.org/curated/en/2010/08/16630506/zimbabwe-public-expenditure-notes-vol-2-4-financial-regulatory-challenges-infrastructure-parastatals-sectors)
Our economy is being crippled by corruption and is currently overburdened with a bloated civil service that is draining the fiscus of much needed capital. By simply capping the salary of CEOs in parastatals to $60,000 PER YEAR, we could go a long way to bringing some modicum of sanity to our public sector. The civil service is made up of 115,655 in Education & Higher Education (only 98,446 are teachers), 25,088 in Health and 45,000 in the army (of which 25,000 are paramilitary). We have more soldiers than doctors and nurses which shows our priorities here. There are about 25,000 contract workers on government payroll. We need to trim down our civil service to its critical mass, or at least try to privatise a larger part of certain sections.
In my next instalment this “bush academic” will provide a sector by sector analysis of imports and try to highlight other possible start-ups geared toward import substitution industries. I will concentrate on specific labour productive profitable sectors of Pharmaceuticals & Biotechnology, Software & Services, Food and Beverage, Oil & Gas, Heavy Machinery and Mining. I will try to highlight some interesting opportunities for SME start-ups that have been inadvertently overlooked.
Clive Samvura who can be contacted at email@example.com