Clinton Pavlovic

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Global growth and south african mining

2020-01-01

In the last couple years global growth has trended downward, leading to earlier speculation that the year 2020 may be a year of global rescission. These predictions haven't, however, come to pass. The updated estimates and projections released by the International Monetary Fund in the last quarter of 2019 painted a better, although not outstanding, outlook for the 2020 year to come.

The recent slowdown in the global economy

A recent decline in manufacturing and industrial output in the emerging market economies significantly contributed to the slowdown in the world economy. The economic downturn in China dealt a massive blow to global economic growth. This downturn stemmed from changes to the country's internal financial regulations, a decline in demand for new automobiles, and the trade policy tensions between China and the United States of America which brought about new lows in business confidence.

A decline in foreign manufacturing and industrial output can have an outsized impact on the South African economy because the mining sector one of the dominant contributors to the country's gross domestic product (GDP). South Africa's most significant mineral exports include gold, platinum, coal, iron ore, and ferroalloys. These are in addition to a whole array of other smaller export minerals, which are in no way less significant, such as manganese ore, chromium ore and copper ore. Slowdowns in the manufacturing and industrial output of South Africa's large trade partners directly impact the price of the associated minerals. Global slowdowns, accompanied by decreasing prices of minerals affect the profitability of many of South Africa's mining companies.

Current 2020 global outlook

The decline in global growth rates in the last few years appears to have stabilised, and growth rates are expected to increase moderately going into 2020. The current expected global growth rate is, however, only between 3.4% and 3.6% for 2020. This represents only a small improvement over the last couple of years which saw the global growth rate dip down to around 3.0% in 2019. Global metal prices are expected to remain the same, or slightly higher, in 2020 when compared to 2019.

While a 3.6% global growth rate is not spectacular, and while South Africa is expected to continue to have a lower growth rate than its fellow sub-Saharan countries, the outlook for some of South Africa's largest trading partners is set for improvement, which could spur demand for South African export minerals. South Africa's large emerging market or developing economy trade partners are predicted to increase their growth rates going into 2020. China is expected to have a growth rate of approximately 6.0% in 2020, with India's economy growing by an expected 7.0%.

The improvements in these countries economic outlooks have, in fact, contributed most to the turnaround in the expected global growth rate for 2020.

In comparison to the emerging economies, South Africa's large advanced economy trade partners are set to grow at a slightly lower rate in 2020 as compared to 2019. Growth in Germany and the United Kingdom is expected to increase slightly in 2020 to 1.2% and 1.4% respectively. However, growth in the United States is expected drop by a few fractions of a percentage in 2020 to 2.1%.

In short, the expected stabilisation of metal prices, together with a slightly better outlook for some of South Africa's largest trade partners, may signal an opportunity for local mines and mineral producers in the short term.

What could possibly go wrong?

Of course, when looking at the IMF's forecast for the global growth rate in 2020, one must remember that it is just a forecast - there's a lot of uncertain factors that could negatively affect expectations. Disruptions to trade pose a large risk to the global growth rate outlook. Trade threats that directly could impact some of South Africa's largest trade partners include possible increases in the trade tensions between the United States and China, and uncertainties surrounding the United Kingdom's exit from the European Union (Brexit). Faster than anticipated economic slowdown in China or the European markets also pose an ever present risk. Global factors such as these, and others like geopolitical tensions in in the Middle East, may cause declines in demand, or declines in risk appetite and a flight to safer assets, putting pressures on global mineral demand.

Closer to home in December 2019 Eskom, the South African power utility, embarked on stage 6 load-shedding for the first time which requires 6,000MW of electricity demand to be rotationally cut off. This unprecedented level of load shedding forced most mining operations to curtail production, and in some instances forced large operations to totally cease production. The net effect of this latest round of load-shedding is still unknown, but it will no doubt have a negative effect on South Africa's mine production and growth rate.

Conclusion

The outlook for 2020 seems slightly better than the past couple years, although this isn't saying much because we have come off of the back of two very poor years. International trade disruptions continue to pose a risk to global growth rates, but in absence of anything that is totally unforeseeable at the moment, 2020 appears like it will be a better year all round.

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