Mining and Manufacturing Data Disappoint
Commentary: 12 November 2018
The rand and the JSE cheered the news last week that the Democrats were able to wrest control of the US House of Representatives from the Republicans in the midterms, a move which might curtail Trump’s trade and tariffs agenda. The Democrats will most likely move against many of Trump’s policies which they deem unconstitutional. Regarded as the proxy for emerging market sentiment, the rand jumped as much as 1.8% to R13.88, its best level since August.
Exports out of China accelerated in October, as shippers rushed to beat higher US tariff rates due to kick in at the start of 2019. Trade in the other direction was also strong, suggesting that the Chinese authorities’ growth-boosting measures may finally be beginning to bear fruit. The upbeat trade readings offer good news for those worried about global demand. All eyes now will be on whether Presidents Trump and Xi Jinping can reach an amicable agreement when they meet later this month.
With OPEC output at its highest level since November 2016, the US’s official re-imposition of sanctions on Iran was met with relative calm by the markets. That is because at $70 per barrel, crude oil is currently $10 cheaper than October’s average. Plus, the US has granted waivers to eight countries that will still be allowed to import oil from Iran for a further six months. These countries depend greatly on Iranian oil and a grace period will give them a little more leeway. Nevertheless, they will not be allowed to import unlimited quantities.
The Energy Information Administration forecasts the oil price at $72 per barrel on average in 2019, $3 less than its previous estimate, partly as a result of rising shale production in the US. The World Bank concurs, saying that Brent crude will average $74 next year, before easing to $69 in 2020. Be prepared for the announcement of possible output cuts from OPEC as a result.
Local manufacturing production growth slowed to 0.1% year-on-year in September, from 1.5% in August, signalling that activity in the sector continues to remain lacklustre. Mining output was just as disappointing. Production contacted by 1.8% year-on-year, driven by steep declines in gold (-20.3%), copper (-45.2%) and nickel (-19.9%). Both data prints mean that the third-quarter GDP growth outlook will remain fragile.
Much to the unions’ dismay, Eskom has announced the start of a retrenchment process for some of its senior managers. The National Union of Mineworkers (NUM) which represents many Eskom workers and even some of its executive management, has retaliated, saying that Eskom cannot retrench without union involvement. NUM is planning a national march in 10 days’ time. The move, while obviously not welcomed by the unions, will go a long way towards trimming operational costs. A World Bank report published in 2016 found that Eskom is overstaffed by as much as 66%.
The Reserve Bank has warned that MTN’s continuing problems in Nigeria could start to pose systemic risk to the local financial services sector. If Nigerian authorities force MTN to repay the $8.1bn it allegedly repatriated illegally, the company might struggle to pay off its local debt, thus heightening the risk to the country’s financial system. MTN’s current debt totals R69.8bn. Compounding its woes is its presence in Iran. Currently R3.4bn worth of dividends and loans cannot be repatriated due to US sanctions. Moody’s has placed Africa’s largest mobile network provider on review for a downgrade.
By Bridget Kelly, Santam
This research has been written by the economist at Santam Structured Insurance Limited (“the Insurer”). Whilst all care has been taken by the Insurer in the preparation of the opinions and forecasts and provision of the information contained in this report, the Insurer does not make any representations or give any warranties as to its correctness, accuracy or completeness, nor does the Insurer assume liability for any losses arising from errors or omissions in the opinions, forecasts or information irrespective of whether there has been any negligence by the Insurer, its affiliates or any officers or employees of the Insurer, and whether such losses be direct or consequential. Nothing contained in this document is to be construed as guidance, a proposal or a recommendation or advice to enter into, or refrain from entering into any transaction, or an offer to buy or sell any financial instrument.
This communication is not intended nor should it be taken to create any legal relations or contractual relationships.
Santam Structured Insurance Limited is an Authorised Financial Services Provider under South African law (FSP 1027).