The economic slowdown in China, the world’s largest commodity consumer, is expected to bring woe to the SA mining sector battling an inefficient rail system that has curtailed exports.
The rand, seen largely as a commodities currency, also set to be affected negatively.
Ominous signs have emerged from China, which over the past two decades was the global economy’s main driver, particularly for emerging markets such as SA.
Chinese consumer spending, factory production and investment in long-term assets slowed further in July from a year ago, according to China’s National Bureau of Statistics.
A fall in aggregate demand also put deflationary pressure on the world’s second-largest economy.
Beijing’s worse than expected July economic data bodes ill for SA exports, commodities particularly with their prices linked to Chinese demand. Strong commodity prices in 2022 provided fiscal relief to SA via a bumper season of corporate income tax collections from mining houses and exporters.
Muted demand from China is likely to depress commodity prices, already lower than in 2022.
Kim Silberman, economist and macro strategist at Matrix Fund Managers, said the slowdown in China affects the outlook for commodity prices.
“Lower commodity prices feed into several aspects of the SA economy. Commodities are a major driver of the rand, which is still very much a commodity currency. We have seen the R/$ exchange rate weaken to over R19 on the back of lower commodity prices as well as dollar strength,” Silberman said.
“Their share price performance shows their resilience in a difficult economy.” China’s “slowdown reduces SA corporate profits, not only in the mining industry, but also in manufacturing and retail, as mining drives these sectors as well. This has obvious fiscal implications for SA.”
The Asian giant’s slowdown comes at a time when data shows SA’s corporate income tax in June undershot by 22%, as mining companies reported a plunge in profits due to lower prices and persistent rail and energy challenges.
Bilateral trade between Beijing and Pretoria grew exponentially over the years, rising from less than R1bn in 1998 to more than R500bn now.
According to trade data compiled this May by online data platform, the Observatory of Economic Complexity, SA exported R5.5bn worth of iron ore to China, manganese ore of R2.1bn, ferroalloys of R1.5bn, chromium ore for R1.4bn and zinc ore valued at R655m.
SA’s commodity exports to China in 2022 accounted for 5% of GDP, highlighting risks the country faces should Chin’s economy weaken further.
The rand’s sudden weakness in the past two weeks is probably due in part to global investors becoming more skittish on emerging markets and commodity producers. Secondly, China is a major trading partner and buyer of SA commodities.
— Izak Odendaal Old Mutual Wealth investment strategist
Old Mutual Wealth investment strategist Izak Odendaal said trouble in China is bound to reflect negatively on sentiment towards emerging markets, which will affect local financial markets.
“The rand’s sudden weakness in the past two weeks is probably due in part to global investors becoming more skittish on emerging markets and commodity producers. Secondly, China is a major trading partner and buyer of SA commodities. A less commodity intensive growth model seems likely, and indeed we’ve already seen import volumes of iron ore, for instance, flatlining, in recent years,” Odendaal said.
“This is not to say that prices for industrial metals will collapse as other factors are also at play, namely the supply situation and demand from other areas such as green energy. But it is always a headwind for any sector if the major consumer is not growing demand any more.”
Odendaal advised SA to use its membership of Brics to diversify its exports to China and attract more Chinese tourists.
“Some shares on the JSE are heavily exposed to China. The miners face potentially challenging times, as noted above, but the likes of Richemont and Naspers tap into the Chinese consumer market where the outlook is much better.”
The share price of Kumba Iron Ore, SA’s largest producer and exporter of the mineral, is down 26% in the past six months, partly due to low prices due to low demand from China as steel demand cools due to a softening property market.
The company in its interim results flagged “China’s slow economic growth and persistent weakness in the property sector”.
As the construction industry consumed 23% of metals in China in 2022, weaker growth will have a negative effect on the demand for steel, aluminium and copper.
Chinese property
Challenges facing the Chinese property sector came to a head on Friday when heavily indebted real estate giant Evergrande filed for bankruptcy protection in the US, adding to fears that China’s unfolding property crisis could spill over into the global economy.
A few weeks ago Country Garden, China’s largest property developer, warned of multibillion-dollar losses and missed bond payments.
Veteran investor David Roche, who predicted the 2008 global financial crisis, told CNBC that China’s economic model “is clearly washed up on the beach with a huge number of legacy holes in it, and it’s not going to take off again”.
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