One man’s meat, another man’s poison
Commodities possibly entering ‘midlife’ crisis
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.