Rand must fall another 15%

Since the end of 2011, South African commodities prices have lost more than half their value in dollars and our mining and commodity manufacturing are in serious trouble.

Long way down

The Bank Credit Analyst estimates that we have 40% further to fall – by 50% to 60% – and that an “overshoot” is likely. At just over $1 800 per ounce, that may mean gold will turn at $450 or even less in say 2023. Platinum may go down further as the Volkswagen scandal may cause diesel car sales to decline, and platinum could drop to $400 per ounce.

In 2013, Statistics SA says the loss was 3% on assets employed for the platinum industry. Since then power costs have increased by 21.7% and labour costs by 33% or so. The rand price of platinum has declined by about 10%.

Moreover, the duration of the decline is longer than the great recession of 2008, although mines and manufacturers have been much more careful about retrenching employees. For manufacturing and mining, if we do not get a further decline of at least 15% in the rand – from R13.80 to about R16.20 – in the next 18 months, mines will have to close.

Inflation now will be at least 1.5% higher than previous estimates over the next few years (based on already weak rand data). But cheaper prices also spur more production, as we’ve seen with coal and iron ore.

The same holds true for steel and the world now has excess steel production, which will take years to sort out. Platinum is recycled cheaper and never goes away and, with the diesel scandal, it too is over-producing. Most of our commodities can be stored and are being stored and often recycled, adding to a very negative picture.

Coal as a major source of power generation may also be over as the world shifts to cleaner [gas and nuclear] and renewable energy. Even oil, which is far more difficult to store, has had a year of 3% over-supply.

Lower oil prices bring luck to the country, but certainly the lower SA commodity prices are a curse. Rail transport and harbours will struggle to get their money back before the next upswing starts to take hold after 2020.

A new path

Now we may be on a similar path to the political realism that produced elections in 1994, but with an economic transition theme.

Not the transition that the current politically correct crowd pushes onto us; simple facts, such as that profits lead to growth and investment which in turn leads to jobs, will come to the fore I optimistically believe.