FIFI PETERS: Keeping tabs on the economy and economic data that comes out is really important. We’re going to dig into the mining sector right now, where we saw big declines in gold and iron ore and coal output dragging the sector lower in the month of May. Mining production dived 7.8% in May, according to data from Statistics South Africa, following a sharp drop in April also. But it could have been worse had it not been for the increased production and output coming from the miners of platinum group metals.
Helping us dig further into the sector, Elna Moolman is senior economist at Standard Bank. Elna, thanks so much for your time. Production was lower, but it could have been worse. I’m just wondering if we should take this as a good thing.
ELNA MOOLMAN: Good evening. I think we need to see all of this in the context of, like you’ve mentioned, very weak April data. Some of the improvement that we saw in May was really just a partial recovery, and we need to emphasise that we had a very sharp contraction in April and a really marginal improvement thereafter.
I think the bigger picture that’s very important is, if we look at the last, let’s say, five years, if we can imagine that in 2017, 2018, 2019, we produced [output equivalent] to a hundred units, then we now [did] just more than 90. So the general trend has really been very negative, and a marginal improvement in May doesn’t really change that bigger picture, with obvious implications for overall economic activity.
FIFI PETERS: What’s behind the general trend that is lower right now, because we focus on the prices or what the prices were doing, and we get a completely different picture of the state of mining – but if you look at the fact that not a lot of these minerals are coming from the ground, and it has been something that’s been going on for a long time. Why?
ELNA MOOLMAN: Absolutely. As you’ve mentioned, we also get in this data set mineral sales values, and there we are looking at a year-on-year increase of 17.5%. If I can show the graph, it’s almost a straight line upwards, as you’ve mentioned, because of very high mining prices, commodity prices. So there are a number of reasons here.
If we look at the shorter-term constraints, then obviously we had the floods in April and there was some destruction and then some delays, so that’s playing a role. And then, of course, there’s been a lot of talk in the media about the more general constraints that we’ve faced in our ports and railways. So that’s definitely playing a role now, but it is one of the factors that have over time become more of a constraint.
Then we’ve had strikes during this period, very protracted ones. And of course, load shedding. I was looking at the detailed data a little bit earlier, and in the second quarter the extent of load shedding, if I add up the megawatts lost, was three times as much as in the first quarter. And, if we look at the June data, it’s even worse than that. So that is undoubtedly also having an impact, in this sector in particular, because it’s one of the areas in the economy that’s least able to generate all of its own capacity.
FIFI PETERS: If you look at the first-quarter GDP numbers, if we circle back to that, I think that showed that we’re back at pre-pandemic levels – just the headline figure. But then you dig in, and the mining sector I think is one of those sectors not in fact [in] a technical recession as it were; the sector has been contracting for three consecutive periods, so it’s a technical recession, is it? But the recession in the mining sector is really different because it’s a recession but companies are making a whole lot of profits right now.
But what has changed in the recent weeks is the pull-back in commodity prices. I just want to know what you think that means for these mining companies, and what this means for the economy.
ELNA MOOLMAN: We should firstly see it in the context of our commodity prices having been very supportive. Firstly during the pandemic we saw some increases in commodity prices and then in the [Russia/Ukraine] war there was a significant increase in our weighted export commodity prices. Even if I compare that to our import prices, then the terms of trade – so export versus import commodity prices – were very high, very supportive of the economy and of the rand.
Now that has started to reverse a little bit. So again, if we take a 10- or 20-year picture, then our terms of trade [are] still very, very high. It’s just not quite as high as it was, let’s say, in the first quarter of the year or at its recent peak. So we should make that distinction: the windfall that we are getting is not quite as strong as it was, but it is still in the longer-term trend very, very supportive. And, like you say, it will have a fall-over impact on the economy. So if I think, for example, about the fiscal consequences, we’ve had all these revenue overruns to a large extent over the last couple of years because of these commodity prices and the benefit that we get from the commodity prices.
So the upside that we were hoping to see is now probably a little bit lower than we thought it could potentially be. Fortunately, because we have seen this happen in the past – in other words, you get these surges in commodity prices – you don’t want to make the mistake of budgeting for indefinitely high commodity prices.
I think Treasury was reasonably conservative in its forecast. And I think generally we were conservative in our growth and fiscal forecast. So this is not really a disappointment relative to what we were expecting, but there was that possibility of further outperformance and positive surprises, and that has now disappeared.
FIFI PETERS: All right. Elna, thanks so much for those insights. Elna Moolman is senior economist at Standard Bank.