Carmen Nel, Merrill Lynch economist
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Mining remains crucial for S.Africa ecomomy
Greta Steyn
Posted: Thu, 18 Oct 2007

[miningmx.com] -- THERE was a time when the gold price - if it had hit a 27-year high of more than US$750/oz, as it did at the end of last month - would have been big news for South Africa's economy.

That isn't the case anymore. Yet the world continues to perceive South Africa as a "commodities economy".

Merrill Lynch economist Carmen Nel says one of the main drivers of South Africa's robust economic growth over the past few years has been the global increase in commodities prices.
could spell disaster for developing countries
"Foreign investors view the South African economy as driven by commodities and invest in the country on the basis of those prices. It's clear that the rand is geared to commodities prices."

Is that view based on the truth about the South African economy or has the country diversified away from commodities enough to mean global markets are mistaken in holding that view?

If you answer the question narrowly by just looking at South Africa's gross domestic product figures it's clear that commodities haven't driven growth over the past few years.

Not only does the mining sector make a very small percentage of South Africa's GDP (5,6%) but the sector has also been in recession in the first half of this year.

Overall, the South African economy grew by 4,7% and 4,5% in the first and second quarters of this year respectively. For most of 2006, the commodities sector was positive but made little contribution to overall growth.

However, commodities prices have indirectly played an extremely important role in the growth success story. You only have to look at an analysis of the composition of South Africa's exports for that to become abundantly clear.

The South African Reserve Bank, in its Annual Economic Report, makes the crucial point that non-gold mining products accounted for about 52% of the value of merchandise exports in first half 2007. That means mining is crucial for South Africa's export performance.

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Gold mining has become progressively less important. The report says that Chinese and Indian growth has contributed to strong international demand for South Africa-produced mining products.

It says over the past 18 months the US dollar prices of South African export commodities jumped by almost 36%. The volume of mining exports increased by a whopping 15,5% from the first half of 2006 to the second half, before moving sideways in first half 2007.

The key point about the importance of mining products for South Africa's export performance is that they have kept a lid on South Africa's current account deficit. (The current account represents all trade with the rest of the world, including "invisible" trade, such as interest, dividends, freight and insurance.)

The value of those exports has also helped offset the high price South Africa has had to pay for its oil imports. It's not only the commodities that South Africa produces that have seen prices rise but also those that the country imports.

South Africa's current account deficit is high. It was 6,5% of GDP last year and was also at this level in the second quarter of this year. At that level the deficit is higher than that of the US, which is seen as running an unsustainable current account deficit.

It's important to note that without the high volume and price of commodities exports, South Africa's current account deficit would have been even higher. Almost certainly, the rand would have been weaker and inflation higher.

The world sees South Africa as being able to afford a high import bill due to its abundance of commodities.

The question is whether the commodities boom is likely to continue.

Finance Minister Trevor Manuel recently had this to say regarding the issue: "An understanding of the drivers behind the (commodities) upswing - Chinese demand, platinum and the autocatalytic industry, the concordance between gold and oil, the bond between diamonds and vanity and high emerging market demand - suggests that the good times are here to stay in the short to medium term.

"But to assume that current prices and the current boom phase reflects a permanent shift rather than a temporary opportunity would be a naïve and risky approach to adopt. And if our analysis is correct, then the slump will come and it will bring with it a significant decline in commodity prices. This could potentially spell disaster for many developing countries..."

There's no need for panic in the short term. Nel believes that the downswing in US economic growth won't be enough to offset demand from other high-growth areas, such as China. She says the commodities markets could easily weather the storm of a slowdown in US growth to only 1,5%. However, if there were a full-blown recession in the US, it might be a different story.