Not dinkum down un­der…

Could plunge com­mod­ity-de­pen­dent SA mar­ket fur­ther into the red

Finweek English Edition - - In The Spotlight - HOWARD PREECE howardp@fin­

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.

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