The tragic events of last week where around 45 protestors and two policemen lost their lives at Lonmin's Marikana platinum mine were the result of a complex set of events with no single party to blame. However, this is part of a much larger political and social shift in South Africa that already is manifesting itself elsewhere too. It is a multifaceted conflict between different political, social and ideological groups, not simply a dispute over labour conditions. The medium-run implications for the sovereign rating are very important - much more so in our view than the short-run fiscal or debt dynamic.

One of the hardest things in discussing the outlook for South Africa is the normally very obvious separation between a bearish long-run outlook (structural issues, politics, notions of economic equilibrium, competitiveness, FDI etc) and the short-run day-to-day and newsflow. Bond and FX markets often tend to ignore event risk even when it does occur - like the ANC policy conference at the end of June - and are more ‘long run' in nature. Equity markets have tended to react more to these longer-run issues. Many of the underlying political, cultural and social currents in South Africa are very difficult to make relevant to investors without specific events. The events at Lonmin's Marikana platinum mine last week, however, transported what seemed to be depressingly familiar (if illegal) labour dispute into something all together different - more so for some of the events that have happened since.

We see these events as a manifestation of worker discontent with the leadership of traditional, entrenched unions who are seen as too closely linked with the ANC and the political elite and too ready to engage in personal enrichment. While the ANC itself seems to have pretty constant voter support in opinion polls (the usual ‘struggle debt' being repaid), the approval for individual leaders and respect for traditional institutions like unions and the government in general are falling. This ties in with ongoing dissatisfaction with service delivery which the central government seems incapable of controlling (in spite of sound policies) thanks to the inefficiencies and mismanagement (and in some cases corruption) of provincial and local governments, which have seen their own violent protests escalate in the past three to four years to a level where they are now so constant (the protests) that they are no longer headline news. Service delivery protests have been disquieting to investors but have not had meaningfully dented competitiveness whereas what is happening now in the mining sector seriously hurts an industry that is still hobbled by severe policy uncertainty (even ruling out nationalisation) and cost inflation.

Taking a step back, we should remember the strikes at Impala in Q1 this year, which caused a serious loss of output that could even be seen in headline GDP as well as loss of life, were also in response to more aggressive illegal union action. The Lonmin tragedy similarly was about aggressive illegal action, this time union on union. The (somewhat uncertain) root of this action occurred when new union, AMCU, grew from nowhere over the past year and increased its share of mine-worker members across a number of companies. This led the NUM to drop below the key 50% share of worker membership required for a union to have "organisational rights" at a mine. The NUM then went on a recruitment drive which further inflamed tensions. Next AMCU demanded additional wage increases as it was the largest union, and promptly called an illegal strike. We have seen in the most recent disputes (at Impala in particular) that AMCU is much quicker to move to violence and stir up its members than NUM. Union-on-union violence then broke out and escalated unchecked over the last week. The police finally got involved on Thursday, and when non-violent attempts to disburse the union members failed and police were (apparently) fired upon they fired back with the resulting loss of 45 lives.

After initial signs that the workers dispersed and would return to work, union discontent now seems to have become more entrenched. There have been visits from AMCU leaders, Julius Malema and Jacob Zuma, and the strike is continuing with the mine still not able to fully recover output. We do not think Zuma's visit yesterday was helpful, especially as he told the company to accept the miners' demands for increased pay. We do not think the government should comment on individual wage settlements in individual companies. The government, while slow to respond last week, has finally set up an inquiry into what occurred, but it has already said that miners should not now be fired for their strike action - in spite of the action being both violent and illegal. Such a stance increases the moral hazard of such cases and is why, combined with the late entry of the police, the situation escalated to such a tragic end last week. The appearance of Mr Malema suggests that despite being expelled from the ANC his influence is far from over. He rallied the striking mine workers and local media reports that he was warmly received and did nothing to dissuade them from further violence. AMCU leadership has also continued to use rhetoric that even promotes further violence. But Mr Malema, while certainly being populist in turning up to Marikana, also is linking what is going on there with his wider attempt to promote himself as the front man for the disaffected masses who are not satisfied with the current ANC or tripartite leadership. It appears that the moderate centre-left is unable to adequately express an alternative to the populace that can bring them on board and promise increased prosperity though investor-friendly potential growth-boosting reforms. Instead Mr Malema and those he represents appear to be more interested in gaining power from those currently entrenched within the power structures of the tri-partite alliance. We see a fundamental paradox in Mr Malema: he is backing an anti-Zuma candidate for the head of the ANC in Deputy President Motlanthe, someone from whom he is far removed ideologically (and therefore in policy terms), while wanting to represent the masses of workers and the populace against the current leadership of the tri-partite alliance, and at the same time wanting to become part of that leadership and yet also being a front for and backed financially by the most entrenched interests of all: the tenderpreneurs.

The discontent of workers has also spread. Yesterday it was reported in local press a wage hike demand has been handed to management at Amplat's Thembelani mine also in the Rustenburg, interestingly from workers directly and not from their established union NUM representatives in the mine. They gave management till Friday to respond to the demands and, given the company has already said that the wage round for this year is done (with an agreement between NUM and the company), we could well see illegal strike action next week. The breaking away from NUM could mean AMCU is gaining influence, or that wider dissatisfaction is enabling collectivisation of workers without a formal union structure. Royal Bafokeng workers also made the same demand (for ZAR12.5k/month) yesterday and workers were prevented from entering the mine last night and yesterdayk morning by colleagues leading to a loss of output in what seems to be the start of some form of illegal strike action even though AMCU is not suspected of being involved.

Our concern here is that if Lonmin caves in and meets the workers' wage demands, then demands by other workers (both AMCU and non-unionised/breakaway) will increase across the mining sector and not just in platinum. The government's intervention could also encourage similar action in other key sectors - of which transport is the most interesting with a new more aggressive breakaway union. We remain concerned about the stability of public sector unions given they accepted such a low and multi-year wage increase package recently. Illegal and violent strike action in other sectors would be another step change for investors to comprehend.

We should also consider that Lonmin has already stepped back from firing the mine workers who went on strike illegally last week after political and media pressure - once again moral hazard for increasing the leeway afforded to workers.

Going forwards then we must see whether the mine companies take a soft or hard line and how much they bow to political pressure; the split of NUM, AMCU and non-unionised/breakaway action for how this is spreading; sectors outside mining; how this is used as part of the ANC succession race by Mr Malema and others (there have already been attempts to tarnish Cyril Ramaphosa via his BEE links to Lonmin); the line the government takes and if Mr Zuma as part of his election battle simply offers the miners everything they want; also how this feeds into the supposedly ongoing platinum sector review by the government which is meant to find how competitiveness can be re-established (we would suggest it cannot within the current broad direction of travel by the ANC/government).

It is not clear when the presidential enquiry into the events of last week will report but one key area to watch for is any changes to labour or mining policy proposed. If it is over-politicised, it could come down very much in favour of the (illegally striking) workers and reinforce government intervention in such disputes with corporates - a bad sign for investors. We will also carefully watch what it says about the role of the police. While it is still not clear if they were provoked to fire (the consensus in the local media appears to be they fired in self-defence even if they used excessive force), the police are another element where moral hazard creeps in for workers with no meaningful threat of arrest or illegal strikes being closed down by (non-lethal) force.

It is also interesting to consider the role of these more aggressive unions in the mining sector policy outlook - they have no say within the ANC structures that decide policy. However, radicalisation of mine workers may force similar shifts in NUM in policy terms (and in their manner of wage negotiations etc) in order to retain members and win back those who have left. This would have an important effect on COSATU and also the ANC and eventually government policy. This does not mean nationalisation but instead more state intervention in the sector (perhaps in wages, perhaps through increased detail around minimum wages by job type) as well as other regulatory changes.

The final key element is the rating agencies. We have expressed a view in the past that, under the current direction of travel for policy and with a Zuma win in Mangaung in December, a downgrade of the sovereign rating was a significant possibility either through H2 next year or into 2014 when the election is due. What is now occurring in the mining sector reflects directly what the rating agencies have been saying - short-run fiscal and debt dynamics are not what is important for the rating, it is social issues and underlying political shifts that are key to the rating. What is occurring now at Lonmin and elsewhere is exactly the type of breakdown of trust and of social institutions that the agencies have warned lead to them having a negative outlook on the rating. More widespread illegal labour action combined with a Zuma win in December and a set of more interventionist policies agreed in Mangaung as result of Zuma winning re-election through policy promises would all increase the likelihood of a downgrade in our view.

Overall then, while mindful of the tragedy of last week we also think that it reflects a deeper dissatisfaction and impatience in South Africa, where the role of a traditionally central institution through apartheid and these first 18 years of democracy - the unions - is now being questioned in favour of more aggression and violence. Weaker traditional unions means a weaker ANC. This is an interesting time for investors to consider these longer-term structural fault lines that they may have looked over of late in the hunt for carry. Perhaps things need to deteriorate further with even an eventual downgrade before investors fully cotton on to what is going on. At least for now more ratings rhetoric and output loss feeding through into the macro data may keep minds focused.

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Written by Peter Attard Montalto
+44 (0) 20 7102 8440
peter.am@nomura.com

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