Mining needs government input to benefit from prices recovery

• Sector contributes to GDP and jobs while tied closely to effects of US monetary, fiscal policies

The SA economy, with its deep roots in mining, agriculture and tourism, showcases a rich tapestry of strengths that have evolved over the years. From the discovery of diamonds and gold in the 19th century, which positioned it as a global mining giant, to its modern advances in technology and finance, SA has demonstrated remarkable resilience and adaptability.

The diversified economy now also thrives on agriculture, which benefits from fertile lands, and a booming tourism sector.

Yet at the heart of its economic prowess the mining industry remains vital, contributing significantly to GDP and employment. However, its fortunes remain closely tied to the effects of US monetary and fiscal policies.

The strength of the dollar, along with US interest rates, significantly influences commodity prices and, consequently, the profitability of SA’s mining exports. This dependency underscores the interconnectedness of global economies, highlighting the importance of strategic economic planning and international co-operation for SA’s sustained growth and prosperity.

The graph highlights the link between the US M2 money supply and commodity prices, outlining significant patterns. Periods of increased money supply, such as during the 1970s and the Covid-19 crisis, are followed by surges in commodity prices. A slower expansion of money supply, observed from the 1980s to 2000, is associated with moribund and volatile commodity prices. The strength or weakness of the dollar has an inverse effect on the demand for commodities and consequently prices.

These observations offer valuable perspectives on the potential direction of the local mining industry.

Global markets are still grappling with the extensive fallout from the monetary and fiscal policy response to the Covid-19 crisis, with SA’s mining sector experiencing significant effects. Initially, the US Federal Reserve responded by cutting interest rates to historically low levels, embarking on significant asset purchases, and the treasury ramped up its spending.

These actions led to an unprecedented increase in money supply, naturally driving a sharp rise in commodity and general asset prices.

As a result, inflation in the US surged to 9.2%, compelling the Fed to undertake corrective action by aggressively raising interest rates starting in March 2022, and balance sheet reductions, which began in June 2022.

Twenty-three months into these adjustments, the federal funds rate has risen from 0.25% to 5.5%, and the Fed has trimmed its balance sheet from $9-trillion to $7.7-trillion. Despite the ongoing pressures from sustained government spending, which saw the deficit increase from $1.38-trillion to $1.7-trillion over the past year, the Fed’s measures have led to a significant reduction in money supply, resulting in downward pressure on commodity prices. Consequently, inflation has moderated below the federal funds rate and closer to the 2% target, allowing the Fed to consider reducing rates.

While opinions differ on when these cuts will occur, recent estimates suggest there will be three rate cuts by the end of 2024, beginning in the latter half of the year.

Furthermore, the Fed plans to continue reducing its balance sheet by about $90bn a month, resulting in an end-of-year target of about $6.8-trillion and bringing a close to this round of quantitative tightening.

Meanwhile, US government spending is on an upward trajectory, with projections indicating that the budget deficit of 6% of GDP will not narrow for the foreseeable future.

Amid the prevailing monetary policy dynamic, the US economy remains stable, indicated by low unemployment (3.7% in December) and moderating inflation (3.1% in January). The Fed remains confident in its ability to sidestep a recession.

Significantly, after persistent declines in M2 since April 2022, money supply has started to increase once again. This dynamic coincided with a recent low in oil prices and other commodities, which have since risen.

The convergence of three key factors — the peak of interest rates, the foreseeable conclusion of quantitative tightening and the positive shift in money supply after a 16month downturn — presents a hint of optimism that commodity prices might be stabilising, suggesting the bulk of declines are in the past.

Despite the potential for future improvements in commodity prices, SA mining companies continue to grapple with a host of enduring challenges, marking a critical period for the sector and spotlighting mineral resources & energy minister Gwede Mantashe’s pivotal role. The landscape is fraught with regulatory uncertainty, infrastructure inadequacy and strained labour relations, all of which severely test the sector’s resilience and adaptability. These issues, compounded by the imperative for environmental sustainability and the effects of global economic shifts and currency volatility, demand strategic foresight and robust solutions.

The guidance of the minister is pivotal in navigating the industry through its challenges, ensuring not only the preservation of its legacy but also fostering the expansion and progress of wider sectors.

Without proactive and supportive national government input into this sector, SA could miss out on any improvement in what has been a rather stressed commodity cycle.

LANDSCAPE FRAUGHT WITH REGULATORY UNCERTAINTY, INFRASTRUCTURE INADEQUACY AND STRAINED LABOUR RELATIONS