Not dinkum down under…
Could plunge commodity-dependent SA market further into the red
THE AUSTRALIAN ECONOMY looks to be sailing into choppy waters – maybe even into rough seas. That’s not good news for South Africa, in principle at least. Australia remains, as does SA, very much commodity-based. That also applies to New Zealand – and times are getting tougher there.
Ambrose Evans-Pritchard, international business editor of the London Daily Telegraph observes: “It’s now clear the Antipodes are tipping into a serious downturn. Australia’s NAB business confidence indicator fell to its lowest level in 17 years in June. New Zealand has begun to cut interest rates on fears that the economy is entering recession.”
Gabriel Stern, of Lombard Street Research, has a key comment that finds strong echoes in SA. He says: “It’s amazing that in the midst of the biggest commodity boom ever seen, Australia has been unable to get a surplus on the current account of the balance of payments. The country has been living beyond its means for 10 years.”
Hans Redeker, currency chief at investment group BNP Paribas, notes: “Australia will now have to generate 4% of gross domestic product to meet service payments to foreign holders of its assets. That’s twice as high as the burden faced by the United States.”
So how does SA compare in this league?
The Economist reports that the US’s BoP current account shortfall is currently running at 4,9% of GDP – less than Australia’s level of 5,5%. However, SA is running much deeper into the red than either. The SA Reserve Bank’s Quarterly Bulletin for June 2008 records our current deficit:GDP ratio as 7,3% for calendar 2007 and an annualised figure of 9% for the January-March quarter this year. Only Greece (-13,0%) and Spain (-9,5%) have bigger proportionate deficit levels than SA.
Therefore it’s glaringly obvious that any significant setback in global commodity prices generally would be extremely bad news for this country – even with major savings in the cost of oil imports.
But is that a serious possibility, over the near to medium term at any rate? As usual, expert opinion is divided.
Chris Green, senior economist at VTB Europe, is at least honest about the limitations of guessing the future prices of many commodities. Asked by the Financial Times about the outlook for metals, he replied with disarming candour: “Predicting the future is a particularly hazardous endeavour. Like most economists I have tended to have more success in forecasting the past!”
But there are plenty of other analysts prepared to stick their necks out – bravely or foolishly. Jim Rogers, author of Hot Commodities, claims the average life of a bull market in commodities has been 19 years. He urges: “By the time this market turns into a ‘bubble’ you’re going to see farmers on the cover of Fortune magazine. If history is any guide, this bull phase may be coming to an end – around 2018 to 2020.”
But Anthony Bolton, a former fund manager at Fidelity, says it’s time for investors to get out of commodities. “After five years of strong commodity prices, a contrarian like myself starts to get worried. I’d switch out of commodity stocks today and put most into the financial sector.”
Even the more cautious Green advises: “The metals markets have been interesting of late because of the recent sharp weakening seen across a number of industrial metal prices.”
Roger Bootle, MD of Britain’s Capital Economics, says: “Over the past two weeks the price of soft commodities has fallen by 10% and oil has dropped by $20/ barrel. Could this be the beginning of a pronounced fall? I believe a fundamental correction in oil and other commodity prices is due at some point. This could be it.”
Bootle adds: “It’s very striking that there have recently been real signs of changed driving behaviour in the US and Britain. Britain’s oil consumption is barely higher today than 20 years ago in spite of a 70% increase in GDP.
But what about the unique change that the rise of China and India implies? Doesn’t it mean rising commodity prices as far as the eye can see?”
His answer: “Not necessarily. But it does imply a higher ratio of commodity prices to manufactured prices compared to what it would have been without their rise. After all, their rise has increased the supply of manufactures while raising the demand for commodities.”
That view is exemplified by the accompanying graph, which shows Chinese vehicle production on line to catch the US by 2016 and then steadily accelerate away.
That suggests not only added demand for oil but also for key materials in motor manufacturing – including platinum and associated metals from SA for exhaust catalysts.