One man’s meat, an­other man’s poi­son

Com­modi­ties pos­si­bly en­ter­ing ‘midlife’ cri­sis

Finweek English Edition - - Openers -

THE 20% DROP in the price of crude oil since its peak of US$147,25/bar­rel as re­cently as 11 July, puts enor­mous pres­sure on the prices of all met­als and min­er­als – even agri­cul­tural prod­ucts, from maize to soya beans. The de­mand for ev­ery­thing called a com­mod­ity is dry­ing up and prices are fall­ing sharply. For the first time it seems the su­per cy­cle in the de­mand for and prices of com­modi­ties may be en­ter­ing a “midlife” cri­sis – if it’s not per­haps the end of the fiveyear cy­cle.

That’s won­der­ful news for the world’s in­fla­tion, which was just start­ing to get out of hand due to the un­con­trol­lable in­crease in the price of fuel and food.

But for SA the news brings mixed re­ac­tion. The fine print of the De­part­ment of Min­er­als & En­ergy tells us we’re cur­rently al­ready pay­ing too much – 125c and 161c re­spec­tively – for petrol and diesel at the pump. That’s an early fore­cast of very large falls in the price of fuel in the first week of Septem­ber.

The price of white maize is cur­rently 25% lower than it was two months ago and there’s ev­ery rea­son to be­lieve the un­com­fort­able in­crease in SA’s food prices over the past 18 months is now over. Ev­ery­thing points to lower in­fla­tion – per­haps even in­ter­est rates – ear­lier than we’d ex­pected. The bad news for SA, of course, is that we’re a net ex­porter of com­modi­ties. The fall of more than 30% in the plat­inum price, SA’s most im­por­tant ex­port com­mod­ity, and the sub­se­quent fall in the prices of plat­inum shares has de­stroyed more wealth – in SA at least – than the so-called sub-prime credit cri­sis, which cel­e­brated its first birth­day last week.

The graphs show the in­dex of the prices of our plat­inum shares fell by about 42% over the past 10 weeks. The to­tal mar­ket value of the shares in the in­dex is now R393bn. Be­tween Oc­to­ber 2007 (when it be­came clear that we wouldn’t es­cape the con­se­quences of the sub-prime cri­sis) un­til June this year – that’s nine months – the JSE’s banks in­dex fell by 40%. Af­ter the fine re­cov­ery over the past two months, the mar­ket value of all the banks in­cluded in the in­dex is now $373bn, still less than the value of all the listed plat­inum shares.

Mea­sured in terms of mar­ket value, the fall in the value of plat­inum shares over the past 10 weeks was more than all the sub-

prime dam­age to our bank shares. Add to that the sharp fall in the prices of the in­di­vid­ual listed gold shares over the past few weeks (see re­port, page 24) and the 35% fall in the price of BHP Bil­li­ton, plus the 28% fall of An­glo Amer­i­can – the mar­ket cap­i­tal­i­sa­tion of each of them is more than that of all the bank shares to­gether or all the plat­inum shares to­gether – and it’s clear that the hic­cup in com­mod­ity prices has al­ready de­stroyed a lot more value for SA in­vestors than the sub-prime cri­sis.

But there’s no doubt that SA’s pros­per­ity was hit hard by the sharp fall in the prices of com­modi­ties, with plat­inum group met­als (PGMs) in the lead. The com­po­si­tion of SA’s so-called PGM ounce, the cur­rent and his­tor­i­cal prices, were as fol­lows as re­cently as 17 April (ap­prox­i­mate) (see ta­ble).

The fall in the value of the PGM ounce over the past three months is 25%. That could re­duce SA’s in­come from the ex­port of PGMs – which could have been close to R100bn for 2008 – by R25bn. That’s a lot more than we will save on the lower cost of im­ported crude oil.

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