All eyes are on China. The Eastern giant’s appetite for raw materials to fuel its growth might have tapered off but some analysts are optimistic that Beijing is still in the market for commodities.

SA is one of the countries affected by the tail end of the commodity super cycle, hence the price fluctuations through 2014 and the first weeks of this year.

Fund advisor at Barak Fund Management Paul Paxinos says this was prompted by structural US dollar strength driven by better economic growth, decreasing account deficits and structural improvements in the US trade balance. These factors translate into downward pressure for US dollar-priced commodities as sellers were able to accept lower prices, and the translation value into local currencies was not affected.

‘US interest rates have been at 0% for the past six years. However, now that the US economy is growing, rates will need to be adjusted in time to curb inflation. We have discounted the impact of US inflation on price movements and believe that the gold price will move lower during 2015.

‘Demand for gold and silver from investors and consumers has tapered off, and key geographical buyers have been absent in these markets.

‘Industrial commodities whose demand structures are linked to the business cycle, of which the price performance is driven by what happens in the major demand centres like China, Europe and the US, are also pressured. Europe is still experiencing macroeconomic headwinds.

‘The Chinese economy is changing from an investment- and manufacturing-driven economy to a consumption-based economy. This depresses exports from African sources. These factors, combined with stockpiles that cause excess supply at demand destinations, have further aided the price pressures seen in copper. The copper spot price is set to fall further. However, many producers continue to produce,’ he says.

‘With the current rand/dollar volatility, quanto futures have been well-received by our market’

CHRIS STURGESS, DIRECTOR: COMMODITY DERIVATIVES, JSE

Paxinos says despite a weak global macroeconomic environment, there’s been ‘robust demand’ for funding of base metal-related trades from African sources. ‘We have further seen demand from offshore off-takers for concentrates containing base and precious metals.’

Mohammed Nalla, Nedbank head of strategic research of global markets, says although recent developments have impacted on the prominence of the resource sector on the JSE, ‘mining and primarily base metals remain large parts of our economy and a significant contributor to export earnings, primarily to China whose voracious appetite for commodities in the mid-2000s fuelled the tail end of the commodity super cycle. It is in this context that we posit that the outlook for metals, and for SA mining more broadly, will largely be dependent on what happens in China this year’.

He says currently sluggish global demand has also hindered the outlook for these commodity prices, capping price gains over the year.

‘Most metals ended marginally positive for the year with the exception of copper. Of concern was the glut in global supply of most base metals, which exacerbated sluggish demand and drove prices lower. Inventory levels in China are also reported to be fairly high, although this has not stopped the Chinese accumulating further physical stock and achieving record iron-ore imports.’

Nalla expects some further downside in metals prices in the near term before stability is found, ‘perhaps later in the year’.

Meanwhile Chris Sturgess, Director: Commodity Derivatives at the JSE, says quanto futures – rand-denominated commodity derivatives that enable investors to gain exposure to price movements in the underlying foreign commodity while shielding investors from fluctuations in the rand/dollar exchange rate – are highly innovative trading instruments that the JSE has introduced. In the metals space, traders in precious metals and palladium can access quanto futures.

‘Quanto futures now enable South African investors to gain exposure to commodities in rands without using their foreign allowance allocations.

‘Products track the pricing of international commodities markets on the NYMEX and, in the case of farm commodities, the Chicago Board of Trade. With the current rand/dollar volatility, quanto futures have been well-received by our market and cash settled commodities, like gold, platinum and crude oil, reference highly liquid international markets for the final cash settlement value. This provides all participants with the assurance that the local settlement price is not open to any abuse.’

By Louise Brougham-Cook
Image: Greatstock/Masterfile