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Johannesburg – A stronger dollar and a weaker global growth
outlook are weighing heavily on commodity prices and South African mining
shares suffer the most.
Worries about the direction into which politicians will send
Europe’s economy last week caused investors to run for cover in the dollar. On
Friday this caused the rand to fall to R8.12/dollar and put commodity prices
under pressure.
Weaker commodity prices in turn exert pressure on mining
shares. The JSE’s resources index is already 8.64% down from the beginning of
the year and 14% below its highest January levels. The resources index
currently has a price:earnings ratio (p:e) of 7.8.
The p:e of the JSE All Share [JSE:J203] index is, on the
other hand, 12.03. This means that resources shares are now relatively cheaper
than other shares on the exchange. The industrial index’s p:e is 18.24.
The gold mining index has lost 18.72% this year and the
platinum mining index 11.81%.
Clive Burstow, who manages Baring Asset Management’s Global
Mining Fund, says the long-term prospects for platinum and palladium are
positive, but he suggests that investors buy the metal itself.
“If you buy platinum shares, you buy the risk of deep-level
South African mines with an increasingly militant labour force in a country
entering an election cycle.”
Burstow says platinum and palladium prices will however
remain subdued this year as long as the global economy is struggling to get
into gear.
“The problem is that these are growth commodities. Their
most important use is for vehicles and the jewellery market, both of which
sectors are economically sensitive.”
Rand Merchant Bank commodity analyst Josina Solomons says
even gold’s status as a safe haven has begun to diminish this year.
Last week uncertainty over Europe brought the gold price
down to $1 573.83 a fine ounce.
“The stronger dollar further depressed the price. This year
the gold price followed dollar movements for 60% of the time.”
First National Bank chief economist Dr Cees Bruggemans says
commodity markets are busy bringing their expectations into line with weaker
growth prospects.
“It's not that global growth has begun to turn out badly,
but that people still remember the past years’ problems and they are worried
enough to believe the worst at short notice.”
Bruggemans says the prices of precious metals have climbed
on the assumption that central banks will continue to stimulate growth in their
economies and that such policies (such as the US’s quantitative easing, where
more dollars are printed) will promote inflation.
But central banks now seem to be satisfied with moderate
growth and instead expect politicians to take action.
Growth could be disappointing in the next few months, but
sufficient progress could be made in Europe to keep the European Central Bank
on the sidelines.
Bruggemans says this means that commodity prices will not be
pushed up by a further injection of liquidity by central banks, but they will
instead be consigned to weathering the poor global prospects for growth.
Signs that the Chinese economy is losing steam has so far this year also weighed heavily on commodity prices.
China’s planned slowing down of growth, and its shift of
emphasis from growing exports to local consumption, go together with less
intensive spending on commodities.
On Friday China announced that industrial production in
April had grown at the lowest rate for almost three years.
Last month Chinese industrial output was indeed 9.3% up, but
economists had expected growth of 12.2%.
- Sake24
For more business news in Afrikaans go to Sake24.com.
