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Commodity curve flattens as Chinese growth dips

Growth in China has slowed from a peak of more than 14 percent in 2007, according to the International Monetary Fund (IMF), to an estimated 7.8 percent this year. The sharp deceleration has changed the outlook for commodities and the companies that produce them.

The impact on prices can be seen in the Thomson Reuters Jefferies CRB commodities index, which plunged from a peak of 473 points in July 2008 to a trough of 200 in December that year. It recovered to 370 points in April last year before falling to 307 last week.

Other commodity indices show a similar pattern.

Hein Boegman, the PwC African mining leader, said last week that gold was the only commodity to gain value this year.

“A weakening rand over the period managed to shield the South African mining industry from the decline, with [rand] prices remaining relatively flat. However, flat prices will not support the industry’s significantly increased cost base.”

So a lot is riding on China’s performance – the IMF has forecast 8.2 percent next year. But the future is more complicated than that. China is in need of economic reform. Its reliance on capital investment and exports to boost economic growth proved very effective – for three decades.

But in 2008 the nature of the world changed. The apparently endless consumption in the West was reined in sharply by the financial crisis of 2007/08 and the global recession of 2008/09. And demand for China’s goods suddenly slumped.

The return of recession to Europe this year has driven the message home.

Analysts expect the new political dispensation in China and economic pressures to change the focus of the economy to the domestic market. Stronger local consumption will make the country and the Asia-Pacific region less reliant on the health of the rest of the world.

Writing in the Sydney Morning Herald, investment strategist Michael Feller noted: “Assuming that such change will involve less reliance on fixed-asset investment to generate growth and a greater focus on social welfare, market liberalisation and domestic consumption, this will have major ramifications for Australia as well.”

South Africa, like Australia, benefited from the sudden emergence of a new market for its commodity exports. Now South Africa’s exports to China are shrinking, after surging between 2007 and last year. How much of this market will be regained remains to be seen.

The mining sector may play an even smaller role in South Africa in future. Already its share of gross domestic product (GDP) has fallen from over 20 percent in 1980 to less than 10 percent last year. And, according to the Reserve Bank, mining products have fallen from 87 percent of total exports in 1980 to 61 percent last year.

Statistics SA data show employment in the sector has fallen from its peak of 765 772 in the third quarter of 1986 to 533 000 in June this year.

As mining companies attempt to recover from the ravages of wildcat strikes, cost cuts will be high on the agenda, ensuring the loss of even more jobs.

Collateral damage will be seen in the sectors that serve the mining industry. Job losses in mining and elsewhere will moderate household consumption. And the government will get lower revenues as mining companies’ profits fall.

Like China, South Africa can expect the shape of its economy to shift in the years ahead. It will need far-sighted policies to guide it through the process; policies that are a bit more responsive to reality than the existing industrial policy action plan.

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