Surging metal prices shielded SA from the worst of the market turmoil that followed Russia’s invasion of Ukraine in what could turn out to be Europe’s biggest military conflict since World War 2.
Confirmation that Russian President Vladimir Putin had approved a full-on attack on Ukraine, and reports of casualties, led to a rush to the safety of developed-country assets such as US treasuries, pushing the dollar higher. The rand slipped to a two-week low, but was still relatively resilient in comparison to big drops in the Russian rouble and earlier, the Turkish lira.
The JSE all share index was down 1.75%, with industrials leading declines. But the performance was still better than most European peers, which fell 3%-4%.
The gauge of leading JSE-listed platinum and gold stocks surged just more than 8%, in its biggest one-day gain since the start of the Covid-19 pandemic, while the price of gold, a safe haven asset that also doubles up as a hedge against higher inflation, surged as much as 3.4% to change hands at $1,973.80/oz. It was the metal’s biggest gain since the start of the pandemic.
Platinum, palladium and rhodium surged on potential supply disruptions because Russia is one of the key producers of commodities, accounting for 40% of palladium production. Palladium rose as much as 9.2% to the highest level since the middle of 2021.
“What you are seeing is the market pricing in the potential disruption to supplies,” said Rowan Williams, a director of Nitrogen Fund Managers.
Finance minister Enoch Godongwana said it was difficult to immediately say what the effect on SA would be. Speaking in Cape Town at a function, he said that while the price of oil, of which SA is an importer, had increased, the situation in Ukraine had also contributed to jumps in the value of other commodities, such as coal.
“As exporters, we are likely to benefit,” he said.
The rand, which often acts as a proxy for sentiment towards emerging markets, was down 2.28% at R15.46/$ by 8pm, having reached its weakest level since February 8. It is still among the best-performing emerging-market currencies of 2022, with a 3.2% gain versus the dollar.
In contrast, Russia’s currency slumped as much as 10% on the day, while Turkey’s lira fell more than 6%, before both recovered some of those losses.
In addition to pressure from oil prices that rose above $100 per barrel to their highest level since August 2014, emerging markets such as SA also face the risk of higher food prices as Ukraine and Russia account for 25% of global wheat exports.
“In the near term, the impact to SA will mainly be through price transmissions rather than the commodities per se. But the general increase in global soya bean and grain prices in general poses upside risks to food price inflation,” said Wandile Sihlobo, chief economist of the Agricultural Business Chamber of SA, a lobby group.
“But the time frame of all these and the scale of the potential conflict will matter more for long-term inflation dynamics.”
Brent crude is up more than 31% in 2022.
Countries that are not direct players in the conflict, such as SA, risk being caught in the middle if Western nations impose crippling sanctions on Russia, a major supplier of oil. This might make it difficult for other nations to transact with Russia, and may create difficulties for local companies active in that market.
“It’s worrying what’s happening,” said Treasury director-general Dondo Mogajane.
“There could be spillover to us in our arrangements with Russia. The spillover effect could be huge, but it will become clearer in a week or two.”
Sustained higher prices of soft commodities and energy could worsen the outlook on inflation, which the Reserve Bank expects to average 4.9% for 2022. The risks may be worsened if a prolonged crisis translates to a weaker rand, pushing up prices of imports.
Markets see-sawed in recent weeks as sentiment swung amid concern that Russia would launch a full-blown invasion. But early on Thursday, Putin launched an attack, saying he was sending troops to the neighbouring country to defend victims of “genocide”, though there was no evidence of such atrocities being committed by the government in Kyiv.
SA called on Russia to immediately withdraw its forces in line with the UN Charter, which enjoins all member states to settle their international disputes by peaceful means. “SA emphasises respect for the sovereignty and territorial integrity of states. As a nation birthed through negotiation, SA is always appreciative of the potential dialogue has in averting a crisis and de-escalating conflict.”
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