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24 July 2017 18:48 (South Africa)
Opinionista Ivo Vegter

SONA 2016: Zuma was incorrect about commodity prices

  • Ivo Vegter
    IvoVegterBW
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

Jacob Zuma blamed South Africa’s weak economic performance on, among other things, commodity prices. In particular, he cited gold, platinum and coal. The problem is, that's not true.

The 2016 State of the Nation Address was filled with eyebrow-raising moments (or drinking shooters, depending on your preferred response to presidential dishonesty). After an hour-long disruption that preceded the EFF’s dismissal from proceedings – president Jacob Zuma elicited laughter by stating: “Many of our [state-owned enterprises] are performing well.”

I’m sure I don’t have to go into detail about bailout-addicted South African Airlines, the oversized locomotives of Transnet, or mismanagement-riddled Eskom. The latter, Zuma explicitly cited as an example: “In spite of the challenges, [Eskom] still manages to keep the economy going, against all odds.”

This contradicted his earlier statement: “Our economy has been facing difficulties since the financial crisis in 2008.”

Of course, the financial crisis in 2008 coincided with the first rolling blackouts instituted by Eskom. The utility is currently before the regulator pleading to be allowed to turn its 8% annual increase into a 16.6% hike. And no, it’s not because it is “performing well”.

A more striking example of deceit was this phrase: “The prices of gold, platinum, coal and other minerals that we sell to the rest of the world have dropped significantly and continue to be low.”

Even in dollar terms, this is not strictly true for the last year, nor over the long term. Of course, all commodity prices declined from highs at the top of the commodity boom, which coincided with the 2008 economic crisis. Some of them still trade lower than those heady highs.

Measuring only from a long-term and anomalous peak, however, is deceptive. The stuff “we sell to the rest of the world” is called “exports”, and while they sell in dollars, our local exporters earn in rands. A weak currency sucks for imports, but it is great for exports, as we all know.

But let’s examine each of his examples, to see if the claim holds up.

Coal peaked at R1,280 per ton in July 2008, and crashed to a low of R460 by September 2009. It has since recovered, and has been trading in a stable range – barring short-term peaks and dips, ever since 2011. In fact, coal tracked slightly higher over the course of the last year, starting 2015 at R719.60 per ton and ending at R754.77 in December. If, instead of measuring the decline over 7½ years, as Zuma did, you take a ten year view, the coal export price has risen by 177%.

The real reason there has been a lack of progress in the coal mining sector has nothing to do with global markets. It has everything to do with the low prices Eskom as a sole domestic buyer pays for coal, the lack of rail infrastructure to the export terminal at Richard’s Bay, aggressive obstruction by environmental groups, and investor uncertainty about a “strategic minerals” clause in proposed amendments to the Minerals and Petroleum Resources Act. We’re not victims of the vagaries of international markets here. In terms of export price, coal is doing just fine.

Platinum, contrary to the president’s pessimistic view, has been on a strong rally as of late. At R15,259.63, its current price is 19% higher than it was 90 days ago. In fact, it is at its highest level since September 2014, and 35% off its lows in 2011 and 2012. Despite a drop in demand for jewellery in China, the outlook remains strong for platinum, with automotive, industrial and investment demand expected to remain strong. According to Johnson Matthey analysts, platinum demand of 8.3 million ounces exceeded market supply by 652,000 ounces in 2015.

Of the three, platinum is indeed the country’s weakest commodity. But again, the problem is not so much its price, but the sector’s woes in South Africa. These are almost entirely the result of high-cost operations, with much of production coming from deep, narrow-reef mines, as well as militant and sometimes violent labour unrest. Not that the president would dare to raise the matter of Marikana, of course. That would raise too many uncomfortable questions about the government’s role in the platinum sector’s decline.

The case of gold is probably the most damning for president Zuma. It has rallied sharply in the last year, closing yesterday at $1,246.40 per ounce, which is a year-on-year high. Of course, gold has traded higher, notably spiking over $1,900 per ounce in 2011. However, although there has been a gradual weakening in the global price since then, mainly driven by slowing demand in China, the price remains considerably stronger than the $1,000 peak of 2008, and the ten-year price of gold is up about 100%, from below $600 in early 2006. Saying that the gold price has “dropped significantly and continues to be low” since 2008 (or just in the last year) is patently false.

But again, let’s convert that to South African rand, which is what we earn in South Africa. The weak rand is great news for gold exporters, too.

In rand terms, gold has risen from a low of about R13,500 six months ago to R19,806.50 per ounce yesterday. That represents a 46% bounce and a 38% rise year-on-year. In fact, the current rand price is a five-year high. In February 2011, it was trading below R10,000. For most of the intervening period, it traded in a stable band between R13,000 and R15,000 per ounce. Gold has been an excellent investment, for anyone trading in South African rand.

Again, there are factors other than the global gold price at work here. Despite declining employment numbers, remuneration has increased by an inflation-beating 11% per annum in the gold sector for the last ten years. While costs have been rising, productivity has declined, as have overall production levels.

Despite these pressures, the weak rand has been a boon for exporters. Thanks to some disastrous economic management, not the least of which is the fact that South Africa had three finance ministers in four days – a fact the EFF demanded that Zuma prioritise in his speech, before walking out of Parliament, but which Zuma did not mention once – the rand has reached record lows.

Even this cannot be blamed on the 2008 crash, however, as Zuma appeared to do. The ten-year peak for the rand was below R6 to the dollar, and while the crash had a marked impact on the 2007 price of about R7 to the dollar, the rand had recovered to that level by 2011. Since then, it’s been a one-way bet for traders in emerging market currencies, which had nothing to do with the financial crisis. It hit its all-time low of R16.96 to the dollar in the wake of the dismissal of finance minister Nhlanhla Nene.

By using the price of export commodities like gold, platinum and coal, over which South Africa has no control, as an excuse for the country’s dire economic state, Zuma was not only blaming others instead of taking responsibility. He was largely dishonest. South Africa’s economic problems are almost entirely of its own making, and many of those factors are in the hands of the government, and indeed president Zuma himself.

We need to remove obstacles to growth,” Jacob Zuma said last night. From the floor came the sharp retort: “That’s you.” DM

  • Ivo Vegter
    IvoVegterBW
    Ivo Vegter

    Ivo Vegter is a columnist and the author of Extreme Environment, a book on environmental exaggeration and how it harms emerging economies. He writes on this and many other matters, from the perspective of individual liberty and free markets. He is seldom wrong.

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