Commodities caveats for SA

As the year opens, there is an air of optimism about the outlook for global commodity prices. “We are certainly in a sweet spot for commodity prices at present, and it’s a good time to be a resource producer,” says Macquarie Research. Citing the positive outlook as one of its main themes for the year, a Citi GPS report writes of “the increasingly constructive supply versus demand fundamentals”.

And the World Bank, in its latest Global Economic Prospects report, predicts global economic growth will pick up this year, to 2.7%, in part because the growth rate in emerging market and developing economies will increase “amid modestly rising commodity prices”.

Last year saw a turnaround in commodity markets, with almost all commodity prices showing gains and investors regaining some of their appetite for the sector.

It was a “China-led recovery”, as Macquarie put it, after a blood bath in 2015. And the broadly positive trend is seen continuing this year as the global economy shows healthier growth, boosting demand at a time when supply has dwindled. The pre-2008 commodity price boom brought in huge quantities of extra supply, with prices crashing in recent years, but much of the oversupply has finally been drawn out, enabling markets to rebalance.

And while demand keeps surprising on the upside, there is a lack of new supply projects, hence a supportive environment for commodity prices.

In theory, that should be good for commodity price exporters such as SA, and the World Bank’s modestly higher global growth forecast of 2.7% for 2017 following last year’s post-crisis low is, in part, thanks to the acceleration in emerging market and developing economies, which it sees growing by 4.2%, up from 3.4% last year.

But “modest” is the key word here. The risks to the sunny outlook are significant. And for SA, the benefits might be underwhelming.

Globally, the economic outlook is clouded by enormous uncertainty about what US economic policies will be in the era of president-elect Donald Trump, and whether his administration will boost the US and global economies with stimulatory fiscal policy or constrain global growth and trade with a protectionist one.

Most important, when it comes to commodities, there is China. Whether its economic growth path will be smooth or bumpy is not clear, and the China story is no longer a one-way upward bet for commodity prices, which Citi warns will continue to be extremely volatile.

It warns, too, that not all commodities will lift, and for bulk commodities such as coal and iron ore, the outlook is bearish because their outperformance last year was “a fluke”, largely because of domestic policy changes in China.

That’s a problem for SA, given that coal and iron ore are among our big commodity exports. For SA, it’s the specific basket of commodity prices that will matter. The precious metals, gold and platinum, loom large in SA’s export mix and it’s not clear if the support for the platinum market is there as it is for other commodities.

But, ironically perhaps, the biggest constraint on our ability to benefit from the uptick in commodities is the rand’s appreciation, which itself has been driven partly by perceptions that it’s a commodity currency.

The US dollar price of a basket of South African nongold commodities jumped by 5.7% in the third quarter of last year, the Reserve Bank reported, but in rand terms, the price declined by 0.9%. So some of what we gain on the swings, we lose on the roundabouts.

What’s crucial, however, is that SA should at least work to ensure it can supply the market when demand is running.

THE RISKS TO THE SUNNY OUTLOOK ARE SIGNIFICANT. AND FOR SA, THE BENEFITS MAY BE UNDERWHELMING