At The Market with Tetrad – All is OK when the price is right


By Brian K Mugabe

THE gold industry has been in the spotlight over the past couple of weeks with allegations against “economic saboteurs” who smuggle gold out of the country at the expen

se of the national interest flying left, right and centre.


Gold panners are being berated for selling their produce to gold dealers who offer a higher price than the legislated sole gold buyer in this country, Fidelity Printers and Refineries (Pvt) Ltd. They, (the panners), should obviously refuse to receive a higher price for their gold and adhere to the prices set at the official rate of exchange! Maybe my logic cells have gone on early Christmas break but this expectation from the authorities does not make sense to me, and clearly neither does it make sense to the gold panners.


Without presuming to advocate the illegal trade in gold, the issue to me, as indeed it has been with the black markets for fuel, basic price controlled commodities, maize, the list goes on, is not one of illegal transactions or the now ubiquitous “economic sabotage” but one of pricing. If the gold, or bread or maize is priced at market related levels there will be no need for parallel markets and their added costs, as it will be far easier for producers to transact through the formal markets. The fact that the illegal gold dealers are able to buy the gold at a substantially higher price than the official one, and still on-sell at a profit, shows how uncompetitive the official price is.


This scenario again highlights the folly of price controls and ceilings that do not take due cognizance of the environment in which businesses are operating. One hopes the Budget, which unfortunately comes out after this article is written, will not advocate for a return of price controls, which have proven time and time again to be ineffective. Rampant inflation is another issue one hopes the budget will address, with last year’s estimates of 96% inflation by the end of this year having proved way off.


The just released inflation figure for the month of October proved more indicative of the rise in price levels, with the CPI gaining 70,2 percentage points on September’s figure of 455,6% to a new record of 525,8% year on year.


The month-on-month rate of inflation also set a new high, reaching 25,3% up from 24,8% in September.


The increase in year on year inflation was attributed mainly to increases in the average price of “beverages, meat, bread and cereals and fruits and vegetables”. These same factors were largely responsible for the month on month increase.


The stock market seemed to take a cue from the jump in inflation, as well as the injection of liquidity into the money market that saw rates tumbling and pointed to the authorities maintaining a lax monetary policy.


Having retraced to 566 622 points last Wednesday, its lowest point since the 6th of August, the index then went on to gain 11% or 61 488 points to close this Wednesday at 628 070, the ‘Budget blues’ seemingly forgotten.


If our market was indeed perfect and we were to take it as a barometer, it would imply the Budget should have nothing but good news for our economy!


Results have continued to flow in and this week we look at two interim performances to September of former Delta group companies, OK and Zimsun.


Beginning with the former, turnover was up 432% to $80,1 billion, as volume reduction was experienced given the fall in disposable income among consumers against ever-rising prices. Interestingly, the company indicated that based on two baskets of goods that it tracks over time, one skewed towards the low income earner, indications were that inflation was ranging between 790% and 915%, probably closer to the ‘real’ rate of inflation that the general populace has to contend with.


Operating income at $9,4 billion was 767% up on last year as margins improved from 7,2% to 11,7%, courtesy of a better, higher margin product mix and repricing of strategic stock purchases. The control of overheads to growth below that of turnover also helped to grow margins.


Interest income at $769 million was well up on the first half of 2002 as the company, which is mainly a cash business, benefited from the rise in interest rates on the money market. Based on the strong operational performance, attributable earnings of $7,8 billion were attained, up 671% on 2002.


Zimsun saw turnover up 343% to $12,7 billion for the period as tourist arrivals to this country remained largely depressed whilst domestic tourism remained weak as the current economic climate, characterized by shortages of fuel, cash and the general decline in consumer spending power, compounded the situation.


As a result, occupancies were down from 45% in 2002 to 39%. Operating profits at $8,7 billion represented a 10-fold increase on the $888 million achieved in 2002, thanks in no small part to $5,6 billion in revaluation gains relating to the group’s 20% investment in Dawn Properties Ltd and the Mozambique operation. Net operating costs increased by 374% to $9,4 billion, driven primarily by the launch and introductory expenses for Elephant Hills. Despite expenses growing at a higher rate than revenues, the booking of the revaluation gains saw operating margins soar from 31% to 69%.


After accounting for equity related profits of $165 million and $135 million in finance charges net of exchange losses on off-shore loans, bottom line earnings of $8,7 billion were achieved, up an impressive 881% on 2002.


Discounting the revaluations however reveals a net profit of $3,2 billion, representing a mere 254% in growth terms, a return which perhaps more accurately depicts the true, current state of the local tourism industry.