BRIAN KANTOR: No such thing as a cycle, only windfalls or their opposite — whiplash
The markets for industrial and precious metals are demonstrating some important truths. The price of iron ore, about $92 a tonne this week, was more than twice as high ($200 a tonne) in early July. Its price is as hard to predict today as it was a year ago, when it sold for a mere $85 a tonne.
The pace of the recovery of the global economy after the lockdowns was unpredictable, and proved surprisingly strong in increasing the demand for steel and iron ore and other industrial metals. It is an expected slowdown in global growth rates, and so in the demand for steel and other industrial metals in the months to come, that has caused prices to fall back as surprisingly.
It should be recognised that there is no predictable cycle of the price of any well-traded metal, currency, share or bond to assist timing an entry to or exit from the market. Were there any regular cycle of prices, or indeed of economic activity, that is a predictable trend towards peak growth rates followed by slower growth then a recovery from the trough, it would greatly help traders, producers or consumers sell at the top and buy at the bottom.
However, such cycles are only revealed well after the events. They are the result of smoothing the data, comparing the outcomes to what occurred a year before, when almost all of the numbers overlap. Day to day, the data looks very different and the future of prices will not be at all obvious. They unfold as a random walk, with most prices having an almost 50% chance of rising or falling on any one day.
Whether these random moves are drifting higher or lower to establish some persistent trend will only be discovered well after the event — perhaps only a year later. All we can attempt — and there is no lack of such attempts — is to model the forces of supply and demand that will determine prices or quantities in future as rationally as possible. And perhaps be bold enough to believe that your model will prove more accurate than the opinions revealed by current prices, which we know will vary with the news.
What happened in-between in 2020 and now to the price of iron ore, and similarly to the value of the platinum group of metals, has had important consequences for the SA economy. They greatly boosted the SA balance of payments, tax revenues and the GDP. Dependence on capital inflows has been reduced, with large contributions from South Africans to the global savings pool of more than $100bn per annum as the foreign trade balance improved. Tax revenues have been growing well ahead of budget projections, approaching an extraordinary extra R250bn of taxes if maintained over a year.
The GDP in current prices has risen almost as high as long-term interest rates to help reduce the debt-to-GDP ratios. Yet long-term interest rates remain at high levels, and are still particularly high relative to short rates, implying a doubling of short-term interest rates in three years. This would be bad news for the economy. It is difficult to make sense of this view of SA interest rates and monetary policy.
While annual growth rates may well have peaked, there is a lot more global demand still in the wings. Post-Covid stimulus continues to this day. The market judgment may be too pessimistic about demand, so prices and revenues may continue to be helpful for resource companies and the SA Treasury that shares in its profits.
How, then, should SA and resource companies react to such a further windfall? The answer should be obvious. That is, look through any temporary surge or reduction in revenues and for the companies to pay out the unexpected extra cash to share or debt holders.
For the Treasury, it would be to spend no more and borrow less. The benefits to both parties in the form of lower long-term costs of raising capital would be large and permanent.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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