WILL the positives for SA’s economy of a lower oil price outweigh the negatives of lower commodity prices all round? It’s hard to get economists to agree on the question, let alone the answer.
The new year’s collapse in the oil price has fuelled a raging debate on how low it will go and for how long. What will happen to other commodity prices is the subject of almost as much debate, however, and the balance matters a great deal for SA.
In oil, the fall has been sudden and steep and, at not much more than $51 a barrel yesterday, the Brent crude oil price was about 55% down on its June 2014 level. But the 40% slide in iron-ore prices over the past year or so has been almost as sharp, if more gradual, as was a 40% decline in thermal coal prices since 2011.
The common factor is weak global growth, and in particular the slowdown in China’s economic growth rate and the shift in the composition of China’s growth away from the heavy investment and infrastructure-led pattern of the past. That’s the underlying factor in what most would agree is a structural shift in global commodity markets over the past couple of years — some would call it the popping of the commodity supercycle bubble.
SA and other emerging market commodity exporters benefited hugely from that supercycle in the years leading up to the crisis. But one of the reasons, arguably, why SA (and its peers) came through the crisis as well as they did was that commodity prices surged again after 2008, peaking in mid-2011. Since then, the prices of SA’s export commodities have been on the decline.
International oil prices had been much flatter — until the middle of last year. Since then, they have played catch-up — and much more. In oil, it’s not just weak demand but also strong supply that is fuelling the global glut. The same is the case in iron ore. And just as analysts are arguing whether Brent will fall, rise, or trend to $80, they are also divided on the outlook for other prices and whether they will all head in the same direction. Iron-ore prices are expected to stay down but coal prices to climb. And there are commodities such as diamonds, where prices have increased on better growth in advanced countries, especially the US.
For SA, the export side of the equation is heavily influenced by four commodities — iron ore, platinum, thermal coal and gold — which together make up 30% of total exports. On the other side of the equation, crude and refined oil account for about 23% of imports.
For the rest of this column, click here: http://www.bdlive.co.za/opinion/columnists/2015/01/07/commodities-conundrum-a-hard-one-to-puzzle-out