Commodity price fall bodes ill for terms of trade
• Coal, iron ore and palladium are down sharply
SA’s commodity export prices are down sharply in the fourth quarter to date, driven by steep declines in coal, iron ore and palladium, an ominous sign for the already weak terms of trade in 2022 amid high energy prices, shortages of materials, and recession fears. A weak trade balance could put downward pressure on the rand given tightening monetary policy worldwide and rising demand for the dollar.
SA’s commodity export prices are down sharply in the fourth quarter to date, driven by steep declines in coal, iron ore and palladium, an ominous sign for the country’s already weak terms of trade in 2022 amid high energy prices, shortages of materials, and recession fears.
According to a research note published by Absa on Wednesday, prices for shipments of commodities from October 1 to November 8 are 13.8% lower than the three months to endSeptember, and on average 4.6% weaker than the same period a year earlier.
The last time SA recorded a merchandise trade deficit was in April 2020. A weak trade balance could put downward pressure on the rand given rapidly tightening monetary policy worldwide and rising demand for the safe-haven dollar.
SA has until now benefited from higher commodity prices that saw their contributions to fiscal revenue increase to almost 5% of GDP in 2020/2021, almost entirely offsetting the negative effects of lower consumption and production.
According to the mediumterm budget policy statement, gross tax revenue this year is forecast at R1.68-trillion for fiscal 2022/2023, an increase of R83.5bn from the budget estimate, which finance minister Enoch Godongwana attributed to better-than-expected collections in the first half of the year.
Godongwana said that was mainly due to the positive effect of high commodity prices and, as a result, corporate income tax was now expected to generate R332.7bn compared with the budget forecast of R269.9bn, while personal income tax is seen at R596.1bn and VAT at R434.9bn.
“Key factors contributing to the higher tax revenue have been the higher profitability in the finance and manufacturing sectors and the high contribution by the mining sector,” he said in his medium-term budget policy statement.
In September, the value of exports increased to a record high of R191.6bn, while imports rose to R171.9bn, resulting in a better-than-expected goods trade surplus of R19.7bn in September. But commodity prices have fluctuated throughout 2022 and global demand is also set to decelerate in 2023 on a weaker macroeconomic outlook, which is expected to weigh especially heavily on steel and other base metals prices.
Absa chief economist Peter Worthington told Business Day the banks research shows SA’s export commodity prices had fallen sharply so far in the fourth quarter, driven mainly by a 35.6% deterioration in coal prices. Iron ore and palladium prices are down 13.7% and 13.2%, respectively, more than offsetting a 13.4% increase in platinum prices.
“Prices of all commodities except for platinum have fallen since the end of quarter three,” Worthington said. “A softening of SA’s terms of trade partly explains our view that the current account balance will remain negative in the fourth quarter and average a deficit of 0.3% of GDP in 2022.”
Jee-A van der Linde, Africa economist at Oxford Economics, said merchandise imports were expected to remain elevated, while export growth slowed as a result of weaker demand in the eurozone and the US, leading to a deterioration in SA’s terms of trade.
“This, together with a buoyant US dollar, will keep the rand under pressure over the coming months,” he said.
“What’s more, load-shedding, theft and strike action tend to contribute to inefficiencies at local ports, which in turn disrupts merchandise trade. Weak economic momentum is expected to carry over to 2023, with real GDP growth forecast to ease to 1.0%.”
Steel production is under pressure from energy prices and shortages of materials, Van der Linde said.
“The demand outlook is mixed, with declining European industrial production and weak US construction activity, while a pickup in China’s economy is forecast to partially support steel demand. Weak global steel demand has also been weighing on demand for iron ore. That, together with robust supply in quarter four, will also put downward pressure on iron ore prices,” he said.
Recession fears are weighing on market sentiment as the outlook for demand continues to deteriorate with the US and the eurozone forecast to enter recession in the first half of 2023 and the fourth quarter of this year, respectively, Van der Linde said.
“Only the recovery of China’s economy can prevent base metals prices from falling too severely,” he said.
PRICES FOR SHIPMENTS FROM OCTOBER 1 TO NOVEMBER 8 ARE 13.8% LOWER THAN THE THREE MONTHS TO END-SEPTEMBER